Investment Viewpoint: positive trends in earnings

Simplify the complex with clear and concise market insights direct from our investment experts every week.

Markets and macro insights with Bernard Swords, Chief Investment Officer

What general picture emerges from the month of October?

• World equities were strong, but the positive news was mainly generated by a few main sectors. IT led the way as the larger corporations upgraded their capital investment plans in order to increase capacity. Utilities also performed strongly, due to an expectation of higher power demand from the expansion of data centres.
• Healthcare too was among the leading industries, following a de-escalation of uncertainty over tariffs after Pfizer agreed a deal with the US administration. Continued resilience in the US economy, along with the Federal Reserve interest rate cut, gave a general boost to markets and to cyclicals in particular.

What changes have we already seen in November? 

• This month the trends have reversed somewhat. The World Index fell by 1.7% in euro terms, with the biggest declines seen in sectors that had previously led the rally – particularly Information Technology and Communication Services. IT stocks were down nearly 5%, suggesting some profit-taking. Cyclical sectors also suffered while defensive sectors like Consumer Staples, Utilities, and Healthcare performed better, with most posting small gains. These developments hint at growing caution among investors, especially regarding the wider economic outlook.
• Economic data remains limited due to the US government shut down, but there were some updates. The ISM Manufacturing Survey showed a decline, mainly due to weaker output at the moment. However, the ISM non-Manufacturing Survey painted a more positive picture, with improvements in production, new orders, and employment – suggesting resilience in the broader services sector.

What other data points sparked particular interest? 

• One data point that caught attention was the Challenger Jobs survey, which showed a spike in layoffs. While this survey isn’t by itself usually taken as a significant indicator, it in this case shows the first sign of potential weakness in the US labour market since the last non-farm payrolls report. Investors have at present fewer sources of wider information on the health of the US economy.
• In Europe, retail sales were disappointing, falling 0.1% month-on-month. Over the past three months, sales are down 1%, pointing to a stagnant consumer environment and a flatlining euro-area economy.

What other developments will prove relevant to markets longer-term?

• The US Supreme Court began hearings on the legality of certain tariffs imposed by the Trump administration. Early indications suggest the justices may be sceptical of the current policy, but it could be June before we get a final ruling. The bond market reacted cautiously, as any changes to tariffs could affect government revenues and debt issuance.
• The US government shutdown is entering continues its second month but there are signs that we could be close to a resolution. Although the economic impact of the slowdown may be marginal, it would be a relief to have it removed.

What is the news on earnings?  

• On a more positive note, the third quarter earnings season remains strong. In the US, corporate profits are up 15% year-on-year – well ahead of expectations. Growth is broad-based, with sectors like IT, Materials, Financials, and Industrials all showing double-digit gains. No sector has reported a decline in earnings.
• In Europe, earnings are also improving, albeit modestly, with 1% growth year-on-year. However, the strength of the euro has proved a burden for sectors like Energy and Materials, which are by contrast performing better in the US, thanks to a weaker dollar.
• Overall, markets appear to be consolidating after a strong rally. While last week’s pullback is not in itself cause for concern, we are watching closely for signs of broader economic softness-particularly in the US labour market, and following from the impact of tariffs. Until more clarity emerges, a cautious approach is warranted as we head toward the end of the year.

Fixed Income markets with Elizabeth Geoghegan, Head of Fixed Income

How have fixed income markets performed in October and what does this mean for our models?

• Fixed income markets posted solid gains over the month, supported by a broad-based decline in yields across both Europe and the US The Euro Aggregate Index rose by 0.81%, while the US Aggregate Index advanced 0.62%.
• These gains came despite a reduction in market-implied expectations for US Federal Reserve rate cuts in December – an adjustment that would typically exert upward pressure on yields. However, several offsetting factors appear to have helped keep yields contained: rising uncertainty around a potential US government shutdown, growing concerns over the narrow leadership in equity markets, and a string of negative developments in the private credit space. Together, these elements contributed to a more cautious tone in markets, helping to anchor yields and support fixed income performance.
• Reports of stress in the private credit market surfaced, with notable developments involving First Brands, Tricolour, and BlackRock. Against this backdrop, it is natural to question if this represents an indication of broader credit concerns, but it seems as though markets are viewing these cases as idiosyncratic rather than as signs of a systemic deterioration in credit quality.
• Most importantly, the recent cases all relate specifically to the private credit market, which operates under a distinct set of dynamics compared to public corporate bond markets. Borrowers in private credit are typically unrated or fall into the sub-investment grade category, whereas public market issuers tend to be large corporations with established investment grade or high-yield ratings. This results in a meaningful divergence in credit quality between the two segments. Despite this differentiation, there was a modest widening in credit spreads, most notably within US high yield.
• Against the backdrop outlined above, it is no surprise that government bonds outperformed corporate bonds in the month of October. Our strategy involves an overweighting of corporate bonds relative to the EuroAgg index combined with an underweight allocation to government bonds. This strategic positioning created a drag on performance. However underlying holdings, specifically long duration government bonds, outperformed the broader market, mitigating any relative drag.

The week ahead: what to watch out for

From the US we will see the CPI and PPI inflation reports, and we may receive the Retail Sales data. China and the euro area will release industrial production statistics and China will also provide an update on Retail Sales.