AI-powered earnings let stocks defy uncertainty

Just two months ago a macroeconomic environment with falling inflation promised a tailwind of lower interest rates, broadening corporate performance and dwindling tariff impacts. Since then, an energy shock and inflation fears have undermined looser monetary policy expectations but are not yet reflected in robust earnings estimates. We favour diversified and selective exposures and stay positive on emerging market equities.

First-quarter reporting in the US is materially stronger than expected with 80% of companies beating expectations, delivering a sixth consecutive period of double-digit earnings growth. This is only the second reporting season since late 2021 in which analysts have revised earnings expectations higher ahead of results. Equities are therefore performing despite increased geopolitical uncertainty. New record highs for global equities are built on robust earnings growth, driven by the technology, financials and materials sectors. However, this remains highly dependent on tech sector capital spending and the energy shock’s potentially delayed impact on demand.

At the global level, the IT sector is on track to drive more than half of the first quarter’s overall earnings growth, boosted by artificial intelligence-related capital expenditure. On 29 April, four of the Magnificent Seven’s results alone added nearly 10 percentage points to blended (estimated and reported) S&P 500 earnings growth as they continue to outgrow the rest of the market. US ‘hyperscalers’ and ‘neoclouds’ – the providers running global data-centre networks – raised their AI capex guidance to over USD 800 billion, implying 70% growth in 2026, and nearly USD 1 trillion in 2027. This reflects expanded data centres and rising memory and component costs. These firms report accelerating AI sales, returns on investment and demand for cloud and business software that has so far been unaffected by higher energy prices and geopolitical uncertainties. Growing evidence of AI monetisation underpins analysts’ forecasts that the IT sector, measured on the MSCI All Country World Index, will post 62% earnings growth this year.

…reporting in the US is materially stronger than expected with 80% of companies beating expectations

This resilience, along with continued earnings upgrades, is letting equity markets rise despite the lack of clarity over the energy shock and its implications for inflation and monetary policy. In addition, management teams have largely reiterated guidance in the face of volatile headlines.

Profit margins remain unusually strong, with net income margins close to 14.5%, the highest in around 15 years, driven primarily by technology, financials and utilities. The sector mix matters because it combines the structural pricing power of large technology platforms, the cyclical resilience of financials, and defensive earnings stability in regulated utilities. It also helps explain why margins can remain firm even as energy prices rise.

Supply-chain constraints are amplifying this cycle, pushing up hardware prices and extending delivery times which can support AI’s infrastructure providers. This is a key reason why technology is the engine of earnings upgrades; demand in the AI supply chain is robust enough that constraints can support revenue and margin visibility rather than choke it off.

For large technology platforms, energy exposure is typically more about electricity than oil, and data centre operators often secure long-term power contracts that can slow the impact of higher costs. The more significant risk is monetary policy. If energy-related inflation keeps the Federal Reserve on hold for longer, valuation support for equities may weaken. That is not our base case, but it is the scenario that would most clearly test the power of earnings to drive stock markets.

… net income margins are the highest in around 15 years

Recent Fed messaging suggests rate cuts are unlikely in the short term. We continue to expect one cut late in the year, conditional on a softening in the domestic labour market and some abatement of the current shocks. This is important because the valuation ‘buffer’ for US equities is not wide: at around 21 times forward price/earnings (P/E), returns are more likely to depend on continued earnings growth than on valuation expansion.

Improving breadth, but not enough to ignore concentration

Beyond technology, there are supportive signs: nine of 11 sectors posted positive growth. Tech and materials have outpaced the wider market, while healthcare and energy are expected to see earnings decline, providing scope for positive surprises. Financial names have delivered solid growth, helped by strong capital markets, resilient consumer dynamics and credit quality, while parts of communications services, industrials and materials have also contributed.

Consumer-facing sectors are still more exposed to the effects of higher energy prices, slower monetary policy easing, and have not yet seen consensus downgrades. In this context, even good results can fail to boost a stock’s price if valuations are already high. That is why the market is currently focused on whether earnings justify today’s valuations.

Our positioning reflects this balance. We remain neutral on US equities overall, but information technology is our highest conviction sector in developed markets because the AI capex cycle continues to offer unusually strong revenue and margin visibility at still attractive valuations.

We also remain positive on utilities, which stand to benefit from rising power demand linked to data-centre expansion and healthcare. Healthcare earnings have been weak this season, but we believe this should prove temporary, leaving room for a recovery in estimates and valuations as policy risk abates and new products become more visible. Higher interest rate expectations also weighed on valuation multiples.

Europe’s earnings season has been more muted than in the US but surprisingly solid so far

Muted European momentum ex-energy

Europe’s first-quarter earnings season has been more muted than in the US but surprisingly solid so far, led by financials, energy and tech. However, only about half of companies have beaten expectations. Earnings revisions have been driven largely by energy, materials and tech, masking broader weakness. European earnings that beat expectations have tended to be less rewarded by investors, and misses more harshly punished. The region is the most exposed to the energy-price shock and global trade disruptions. Analysts still expect earnings growth of around 13%; we see growth closer to 6%.

In addition, US dollar weakness has provided an earnings tailwind for the US of around two percentage points, and a comparable headwind for Europe. Overall, we therefore stay neutral on the euro area, given fair valuations, and clear risks to earnings momentum.

Emerging earnings accelerate

We remain positive on emerging markets because they offer a compelling combination of faster earnings growth, a valuation cushion, and direct exposure to the same AI capex cycle that is driving US leadership – but at a more reasonable price. After a disappointing fourth quarter, emerging market earnings growth has accelerated, with companies beating earnings expectations alongside revenue and margin expansion.

The most important shift is which firms are driving emerging earnings. The AI infrastructure cycle is increasingly dominant, with 80% of the growth concentrated in semiconductor exporters, particularly from South Korea, and to a lesser extent Taiwan, where supply bottlenecks support pricing power.

Beyond IT, commodities are also contributing to some emerging market earnings, benefiting energy and materials exporters such as Brazil and South Africa. However, this is not uniform. China and India remain more challenged: China still faces consumer and margin weakness in competitive sectors, even if the IT sector and strong exports partly offset this, while India has suffered from major flight disruptions and rising energy prices. Selectivity therefore remains essential.

We therefore favour diversified and selective equity exposure… and stay positive on emerging markets

This earnings season and its resilient guidance show why global equities can rise even with an uncertain macro narrative. But reporting is also clarifying the market’s vulnerabilities: earnings strength is still disproportionately dependent on AI-linked capex and a relatively narrow set of technology-led themes.

In our view, the right investment response is neither to dismiss the rally nor to chase it indiscriminately. With valuations high and interest rate cuts less certain, positive global returns increasingly depend on continued earnings upgrades and durable margins rather than on further rises in valuations. We therefore favour diversified and selective equity exposure, remain neutral on the US market overall while preferring information technology and utilities within developed markets, and stay positive on emerging markets where exposure to AI’s suppliers is available at more attractive valuations.