Turning turbulence into triumph: Two stocks mastering market themes

Five powerful themes are reshaping the investment landscape, creating winners and losers across global markets. The AI revolution stands as the defining narrative, driving fundamental shifts in capital allocation and valuation frameworks. Lower interest rate expectations and regulatory reform have reignited investor confidence, while Trump’s tariff agenda injects supply chain uncertainty and continues to impact both corporate margins and consumer spending power. Meanwhile, geopolitical tensions fuel unprecedented defence spending and strategic consolidation as companies position for an increasingly fragmented world.

These converging forces created a tale of two markets during 2Q25 earnings season. On the surface, the numbers appeared robust: over 80% of US companies beat earnings expectations, guidance upgrades accelerated to double the 1Q25 rate, and consensus pushed earnings growth forecasts to an impressive 11% and 13% for 2025 and 2026 respectively. Yet beneath this veneer of strength lay a more complex reality. Earnings growth concentrated heavily within just three sectors and performance diverged sharply among industry peers.

This bifurcated landscape has created an unforgiving environment where execution excellence separates winners from casualties. Companies skilfully navigating these themes are thriving, while those stumbling face harsh consequences. Two high quality companies with underappreciated earnings potential that exemplify this successful navigation are Amphenol and O’Reilly Automotive, transforming market complexity into competitive advantages and turning potential headwinds into powerful tailwinds through exceptional strategic execution.

US 2Q25 Reporting Season – Strong overall growth of 12%, but largely driven by 3 sectors

Five themes defining corporate performance

The recent reporting season once again highlighted these five powerful themes that continue to reshape the investment landscape and define how companies are adapting to the current environment. Below, we examine how these themes have evolved and intensified through the latest earnings cycle:

1. AI From Speculation to Implementation – While AI mentions remain near historic highs, corporate discourse has evolved from speculative possibilities to concrete implementation strategies. Management teams are increasingly providing detailed progress updates and specific use cases rather than broad theoretical benefits, though most companies acknowledge they remain in the early stages of realising meaningful productivity gains.
2. Defence Modernisation Acceleration – Global defence expenditure has surged amid a pronounced strategic pivot toward deterrence capabilities and military modernization. NATO member commitments are escalating from 2% to targeted 3.5-5% of GDP by 2030, exemplified by Germany’s €500 billion defence infrastructure fund. Global defence spending is projected to expand at 9% annually from a $2.5 trillion baseline.
3. Tariff Adaptation Strategies – The shift from uncertainty to operational reality has prompted comprehensive corporate responses across multiple fronts. Three-quarters of affected companies are actively restructuring supply chains and renegotiating supplier agreements, while over half are implementing customer price pass-throughs. Strategic import frontloading ahead of tariffs has complicated near-term financial interpretations.
4. Strategic M&A Consolidation – Acquisition activity has intensified with a pronounced focus on strategic technology capabilities rather than traditional scale benefits. Well-capitalised companies with proven execution capabilities are pursuing disciplined transactions targeting AI competencies, industrial consolidation opportunities, and infrastructure enhancement despite broader economic uncertainties.
5. Consumers Not out the Woods yet – Despite some recovery from the prior quarter’s sharp deterioration, consumer sentiment remains fragile with management guidance pointing to a challenging second-half outlook. Real consumer spending growth is projected at just 1% annualised through H2 2025, driven by softer employment growth, tariff-induced inflation, and scheduled transfer payment reductions. This environment favours companies with defensive, non-discretionary revenue streams as price-sensitive consumers prioritise essential spending.

Increased confidence in corporates’ ability to mitigate tariff headwinds

Quality in action: Two exceptional operators

Among the winners emerging from this challenging environment, two companies showcase exceptional strategic positioning across multiple themes. Amphenol and O’Reilly Automotive have not merely survived current market forces—they have actively leveraged them to strengthen their competitive moats, accelerate growth, and deliver consistent outperformance through disciplined execution and opportunistic capital deployment.

Amphenol (NASDAQ: APH): Wired for AI, armed for defence, primed for M&A

Amphenol, a leading connector and fibre optics supplier with 12% global market share, sits perfectly at the intersection of three key themes: AI infrastructure buildout, defence spending acceleration, and strategic M&A activity.

• AI Content Multiplication Amphenol expects to grow at 2x their end markets due to significant content uplift in AI applications. Unlike traditional data centres. AI requires every chip to be interconnected, creating multiples of connections. This structural advantage delivered exceptional Q2 2025 results—revenue beat expectations by 11% and EPS by 21%. Management noted AI customers “continue to spend with no one slowing down investments.”
• Strategic M&A Execution The $10.5 billion CCS acquisition exemplifies Amphenol’s disciplined M&A approach in today’s active dealmaking environment. Acquired at a reasonable 11x EBITDA, CCS brings $3.6 billion in expected 2025 sales at 26% EBITDA margins. The deal adds complementary fibre capabilities with minimal overlap to existing operations. With leverage remaining under 2x and management’s proven integration track record (13% annual revenue growth over five years, 2x their end markets), this represents smart capital deployment in an M&A-friendly market.
• Defence Expansion The $300 million acquisition of Narda-MITEQ, a leading provider of active RF and microwave components, expands Amphenol’s existing defence exposure. This positioning capitalizes on unprecedented global defence spending increases driven by geopolitical tensions and deglobalization trends.
• Structural Margin Expansion Management raised conversion margin targets from 25% to 30%, citing better pricing power as technology complexity increases. This adds a new earnings growth lever beyond their traditional organic growth, M&A, and buyback strategy.
• Attractive Valuation Trading at 30x CY26 EPS versus the S&P 500’s 21x, Amphenol’s market premium sits at the lower end of its historical 40-85% range despite earnings growing 40-50% above average years. The combination of AI content multiplication, strategic M&A execution, and defence market expansion positions Amphenol as a clear beneficiary of three of today’s dominant investment themes.

Amphenol – Strong earnings upgrade cycle underpinned by multiple growth levers and pricing power

O’Reilly’s (NASDAQ: ORLY) wide consumer moat meets supply chain mastery

O’Reilly demonstrates how best-in-class operators are able to turn challenging conditions into competitive advantages. As a leader in the automotive aftermarket industry with 6,200 stores, the company benefits from non-discretionary vehicle maintenance demand while demonstrating superior tariff navigation.

• A Resilient Industry The automotive aftermarket’s structural advantages shine during uncertainty. Vehicle repairs remain essential regardless of economic pressures, with aging U.S. vehicle fleets and rising light truck penetration driving sustained demand. O’Reilly’s dual-market strategy serves both DIY consumers (52% of sales) and professional mechanics (48% of sales), providing diversified exposure to recession-resistant spending.
• Tariff Management Excellence With 20-30% of costs sourced from China and 10-15% from Mexico, O’Reilly faces meaningful tariff exposure but has demonstrated exceptional pass-through ability. Same-SKU inflation accelerated from 0.5% in Q1 to 1.5% in Q2 2025, with management seeing “substantially more” pricing power potential than currently embedded in guidance.
• Solid Execution O’Reilly delivered strong second-quarter 2025 earnings, growing comparative sales by 4.1% (beating expectations of 3.7%) and expanding its gross margin by 70 basis points. Despite elevated SG&A spending, management raised full-year comparative growth guidance to 3-4.5% from prior 2-4%, suggesting conservative positioning with upside potential.
• Widening Competitive Moat O’Reilly’s unrivalled distribution network—30 distribution centres and 385 hub stores enabling 5-night weekly delivery—provides superior service versus struggling competitors. With NAPA facing operational challenges and Advance Auto Parts in financial restructuring, O’Reilly is well positioned to continue capturing market share in a consolidating industry.

The combination of defensive demand, tariff-induced pricing tailwinds, and market share opportunities positions O’Reilly for sustained outperformance as macro headwinds become competitive advantages.

O’Reilly enjoying superior earnings growth relative to key peers over the last decade

Navigating Complexity Through Strategic Selection

Today’s investment landscape rewards execution excellence while punishing missteps, as these five forces—AI implementation, defence modernisation, tariff adaptation, strategic M&A, and consumer resilience—create clear winners and losers even within sectors.

Success requires identifying companies that transform these forces into competitive advantages. Amphenol capitalizes on AI content multiplication and executes disciplined defence acquisitions, while O’Reilly turns tariff headwinds and consumer pressure into earnings and market share gains.

As earnings dispersion widens and market patience diminishes, broad sector exposure is insufficient. Investors must focus on best-in-class operators with proven execution capabilities and structural competitive advantages. In this bifurcated environment, owning quality companies like Amphenol and O’Reilly provides both defensive characteristics and offensive growth potential, positioning portfolios to benefit from, rather than merely endure, the forces reshaping the global economy.

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