Earnings season can give investors a glimpse into what's currently driving the market. With the bulk of the second-quarter earnings season in the rearview mirror -- more than 90% of S&P 500 (^GSPC -0.64%) companies have already reported as of this writing -- three major themes should be on every investor's radar. Let's look at each.
Big tech and AI are still driving the market
The first big takeaway is that the hype around artificial intelligence (AI) is not cooling off. Megacap tech companies are still spending huge on this technology with their investments only expected to rise.
Microsoft's quarter was a great example of this theme with the company seeing strength across its businesses, all driven by AI. Its cloud computing unit, Azure, led the way, but its enterprise software business also saw strong growth as adoption of its Microsoft 365 Copilot apps accelerated. Alphabet and Amazon's cloud businesses also saw robust growth, and and all three companies said demand outstripped capacity.
Meta Platforms was able to harness the power of AI to help drive strong ad revenue growth. The same was also true for Google's search business and Amazon's ad business.
Big tech companies continue to lean into AI infrastructure spending. Alphabet raised its yearly capital expenditure (capex) guidance by $10 billion to $85 billion, while Microsoft said it would spend heavily on servers and graphics processing units (GPUs) in its new fiscal year to try to meet growing demand.
This, not surprisingly, is leading to robust growth in the semiconductor space. Nvidia continues to be a standout, while Advanced Micro Devices also saw strong growth outside of China. Taiwan Semiconductor Manufacturing saw a 44% increase in revenue as it remains the market leader in manufacturing advanced chips.
Right now, the impact of AI is real, and the biggest beneficiaries are the biggest companies in the tech space.
Consumers are pulling back on quick-service dining
There is an interesting dichotomy in the restaurant space right now. There was a clear pullback in quick-service dining in the U.S. during the second quarter, and it affected both fast-food and fast-casual chains.
The fast-food space was more of a mixed bag. Yum Brands saw its U.S. same-store sales (comps) sink 5% for the KFC and Pizza Hut brands, while its Taco Bell division saw a 4% increase. McDonald's U.S. comps were strong, rising 2.5%, as it leaned into value offerings.
However, other brands were weaker with Wendy's seeing a 3.6% decline in U.S. comps and a 7.1% decrease for Jack in the Box. Both Wendy's and McDonald's called out breakfast as being weak spots.
The usually more resilient fast-casual category struggled in the second quarter too. Chipotle Mexican Grill saw a surprising 4.0% decline in comps, while Cava Group's results came up well short of expectations. Sweetgreen's comps plunged 7.6%.
Surprisingly, though, casual restaurants were seeing robust results. Chili's, owned by Brinker International, led the way with comps up 23.7%, driven by strong traffic, positive mix, and price increases. Dine Equity reported 4.9% comps growth for its Applebee's chain, while Darden's Olive Garden saw comps increase 6.9%.
Right now, the economy appears to be weighing on lower-income consumers, who are shifting to value options as a result. This is an environment in which McDonald's has typically been able to shine compared to the competition.
More interesting, though, is the shift being seen between fast-casual and casual dining. With prices for fast-casual chains up quite a bit over the past few years, specialists in casual dining, led by Chili's, have been able to lean into value promotions and viral marketing to draw in younger customers. It's working and taking market share away from fast-casual stalwarts. This is an interesting dynamic to keep an eye on.
Image source: Getty Images
Tariffs are starting to bite across industries
The last big theme this earnings season is the growing drag from tariffs. One of the hardest-hit sectors was the auto industry. Both General Motors and Ford Motor Company absorbed huge tariff bills, although both were confident in their strategies to mitigate the impact.
Consumer staple companies are also feeling the effect. For example, Procter & Gamble and Colgate-Palmolive both flagged tariffs and rising costs as pressure points. That means these companies need to actively manage prices and cut costs just to keep operating margins in line.
Retailers added their own perspective. Walmart had a strong quarter, but management discussed how the impact of tariffs would start to flow through to consumers as it began replenishing more inventory.
What stands out is how broad the impact is becoming. It's not just automakers or niche industries; tariffs are affecting nearly all of them. The big question is: How much will tariffs hurt the consumer down the line, and could they drag the economy into a downturn?
