Corporate confidence points to further equity upside

At the end of the first quarter reporting season, corporate trends have proven more resilient than expected. Together with easing worries over the economic impact of US tariffs, this has helped to alleviate investors’ fears and fuel equities. The outlook for stocks is becoming more constructive and we have increased exposures to global equities.

Investors were apprehensive about the global economic outlook in March and that pessimism intensified with the US administration’s tariff announcements of 2 April. President Trump’s decision to pause tariffs by 90 days on 9 April marked the beginning of a turnaround for investor sentiment. Better-than-feared management guidance through the earnings season and encouraging US/China trade talks in mid-May helped to extend the rally. After a peak-to-trough 11% decline in April, the MSCI All Country World index has now recovered to post a gain of almost 5% year-to-date.

Approximately 10% of US companies reporting earnings disclosed explicit tariff impacts that suggest a mid-single digit percentage headwind for earnings on average. Markets welcomed firms’ transparency, and that the effects on most appear manageable.

Markets welcomed firms’ transparency, and that tariff effects on most appear manageable

Given the impact from tariff and US policy uncertainties, it was a positive surprise that 58% of the American firms reporting results maintained their full year guidance unchanged. In addition, contrary to expectations that companies would cut their guidance, just 16% of the US companies downgraded their outlook, a share slightly lower than the historical average of 18% (see chart 1).

Robust capex commitments dispel fear of an imminent slowdown

In recent months, investors questioned the sustainability of strong spending on data centres and whether plans to ration capital expenditure (capex) could grow. As growth in cloud computing revenue also slowed, investors were concerned about a return to significant investments. However, first quarter earnings from mega-cap technology companies dispelled those fears; most reiterated high capex commitments (see chart 2), and reported that cloud computing revenue has reaccelerated, as capacity constraints start to ease.

Industrial companies involved in the ongoing data centre construction boom also reported record orders, corroborating the view that there are limited signs of an economic slowdown yet. For electricity and power-exposed companies, the high voltage grid backlog reached record levels, three times higher than 2022, confirming the need for ongoing investment in electrification.

Tech, cyclical sector strengths

Digital advertising is a large market that may serve as another barometer for the health of the economy. Large internet platforms reassured investors that advertising spending remains robust, even in the most cyclical segments such as travel, where few airline and hotel operators have issued profit warnings.

This reinforces our preference for cyclical over defensive names in a portfolio

We were also encouraged by signs of recovery in the industrial sector, where order growth is now rising on a year-on-year basis for businesses implementing greater automation, and semiconductor firms exposed to industrial activities.

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All this reinforces our preference for cyclical over defensive stocks in a portfolio, and in particular the communication services sector. This sector offers more attractive valuations and less volatile fundamentals compared with semiconductors and hardware.

Record buybacks, consumption risks

Share buybacks reflect management optimism and are positive for investors when executed at attractive valuations. We thus see record buyback announcements in recent months, concentrated in cyclical sectors such as technology and financials, as another positive sign. Most of these programmes are scheduled to be executed over the rest of 2025, providing an ongoing bid in the market to buy shares.

Not everything was positive for the outlook however, as consumption demonstrated clear weaknesses. Corporate results among consumer discretionary and staples stocks for example were weaker than expected across most income brackets and product categories, from luxury goods to fast food chains. Given some consumers have also brought forward purchases of big-ticket items ahead of higher tariffs that they will not repeat, we cannot yet rule out a faster-than-expected slowdown in the second and third quarter. For early indications of a change in consumer health we are watching high frequency data such as monthly credit card use. So far in May, this data has shown spending reaccelerate.

We see high, single-digit potential in our base case over the next 12 months

A positive outlook

Overall, the better-than-expected earnings season has seen corporate confidence countering investor concerns. While there are still challenges, fundamental trends and technical momentum signals are now providing a more positive outlook for equity markets and we see high, single-digit potential in our base case over the next 12 months.

We have raised our global equity allocations to overweight by increasing both developed and emerging market stocks. In developed markets, we favour Japan, where valuations are attractive, and the earnings outlook is promising. In emerging markets we retain a preference for India. At the sector level, we continue to favour cyclicals such as communication services and materials. In contrast, consumer staples and energy are our least preferred.