Q3 2025 S&P 500 Earnings: Growth Exceeds Forecasts with AI-Driven Sector Shifts

The S&P 500's earnings grew 10.7% in the third quarter of 2025, exceeding Wall Street's roughly 7% forecast. The surge was led by the "Magnificent 7" stocks, which collectively delivered 21% earnings per share growth, far outpacing the market. Artificial intelligence demand was a key driver, fueling strong results in sectors like utilities and industrials through heightened energy consumption and infrastructure spending.

However, Meta Platforms posted an earnings miss due to an unexpected tax charge, a rare stumble among the tech giants. Despite that, 83% of companies reporting beat estimates, reflecting broad-based strength. The IT sector was the standout, posting 40% EPS growth, but performance varied widely within sectors, highlighting the need for careful stock selection.

AI's Productivity Paradox

Enterprise AI spending exploded in 2025, reaching $37 billion – a 3.2x surge from the $11.5 billion spent in 2024, capturing 6% of the SaaS market. This rapid adoption was fueled by high conversion rates for AI deals (47% vs. 25% for traditional SaaS) and product-led growth strategies that spread AI tools through organizations faster than legacy software. Startups secured 63% of the application layer market share, driving feature innovation and bottom-up developer adoption.

Worker productivity gains are tangible. Employees using AI tools report saving 40-60 minutes per day and note significant quality or speed improvements – 75% overall, with IT, marketing, and engineering teams seeing the strongest benefits (87%, 85%, 73% respectively). Usage signals explosive growth; weekly ChatGPT Enterprise messages surged 8x while structured workflow usage jumped 19x. However, scaling remains a major hurdle. Despite 88% of organizations using AI in some function, only 33% have deployed it enterprise-wide. Smaller firms lag significantly behind larger companies, with only 6% of respondents achieving truly transformative outcomes that prioritize growth alongside efficiency.

Sector adoption is uneven. While IT, healthcare, manufacturing, finance, and professional services lead, scaling is typically confined to one or two functions, with AI agent experimentation concentrated in IT and healthcare. Most benefits reported are modest: 64% cite AI-enabled innovation, but 39% see less than 5% EBIT impact, primarily driven by cost savings in software and manufacturing, and revenue growth in marketing and product development. This gap between widespread tool usage and deep, organization-wide transformation highlights significant execution challenges – cultural resistance, integration complexity, and talent shortages likely prevent many firms from fully capturing AI's potential despite the impressive early gains and spending surge.

Sector Dispersion and Supply Chain Dynamics

Turning to sector-level dynamics, dispersion and supply chain pressures are reshaping investment options. Sector performance diverged sharply, with the IT sector's top and bottom performers differing by more than 300% in returns, underscoring how AI-driven fundamentals are reshaping entire industries.

Revenue growth across the S&P 500 reached 7.9% in the third quarter, driven by double-digit gains in IT and healthcare, while 83% of companies beat earnings estimates.

Global semiconductor equipment billings rose 11% YoY to $33.66 billion in the third quarter, reflecting strong demand for more powerful microchips (advanced logic), memory chips (DRAM), and the process of assembling and protecting these chips (packaging), with a 2% quarterly increase and China's significant contribution to shipment growth, though inventory pressures linger for some components according to SEMI.

Valuation Outlook and Risk Guardrails

Building on the fundamentals discussed earlier, the valuation outlook for the Magnificent 7 and AI‑driven firms hinges on two key dynamics: an earnings‑driven re‑rating potential and a supportive Federal Reserve stance.

S&P 500 earnings grew 10.7% year‑over‑year in Q3 2025, with 83% of companies beating estimates and a recent Fed rate cut supporting the broader market backdrop according to Forbes. Meta's earnings miss, driven by a tax charge, stands out as a notable outlier.

On the AI front, McKinsey's 2025 survey shows 88% of organizations use AI in at least one function, but only 33% have scaled AI enterprise‑wide, and high performers-just 6% of respondents-prioritize growth and innovation alongside efficiency.

Thiry‑nine percent of firms cite an EBIT effect from AI (median impact under 5%), while 62% are experimenting with AI agents, primarily in IT and healthcare, though scaling remains confined to one or two functions.

These scaling challenges temper optimism around AI‑driven earnings growth. Given the mixed picture-high penetration but limited scaling, and occasional earnings misfires-investors should maintain a cautious stance and stress‑test growth assumptions under downside scenarios.