Investment Viewpoint: Earnings performing well despite volatility

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

How have markets been faring in 2026 so far? 

• Financial markets have made an encouraging start to 2026, with global equities rising just over 2% in euro terms and fixed income delivering a more modest but positive return of around 0.75%. The broader economic backdrop remains supportive. Global growth is holding at, or slightly above, its long-term trend, helped by strong recent data from the United States. Business sentiment indicators such as the ISM surveys have moved back into expansion territory at around 52 to 53, and the US labour market has shown signs of improvement after a softer period late last year.
• In the euro area, consumer spending and services activity continue to provide momentum, leading to modest upgrades to growth forecasts. Following the recent election in Japan, reflationary fiscal policies are expected, and more generally, fiscal policy across major economies looks set to contribute positively to growth this year.

What have the developments have we seen in central banks? 

• Central banks remain a stabilising influence. The nomination of a new Federal Reserve Chair removes an element of uncertainty. Although the new appointee has previously expressed a preference for lower interest rates and a smaller balance sheet, the direction of policy will ultimately depend on economic conditions.
• In Europe, the European Central Bank appears firmly on hold, with improving data suggesting little need for near-term policy changes. Inflation has edged lower, particularly core inflation, which is notable given the ongoing effects of tariffs. Taken together, these trends point towards a backdrop of stable or potentially lower interest rates across developed markets in 2026.

How is earning season progressing? 

• Corporate earnings have also provided support for investor sentiment. The fourth quarter reporting season is progressing well, with US companies delivering earnings growth of 15% year-on-year, around eight percentage points above expectations. European companies have returned to positive earnings growth too, with profits up 4% year-on-year and roughly three percentage points ahead of forecasts.
• Importantly, a large majority of companies issuing guidance, almost 70%, are raising their outlooks, with fewer than 10% lowering expectations. This reflects both resilient demand and strong operational performance.

What is causing the volatility in markets? 

• Although overall equity indices have been steady, sector performance has been more mixed. Commodity related sectors, particularly energy and materials, have led the gains, while parts of the technology market, most notably the software sector, have experienced sharp declines, falling nearly 20% year-to-date. This has been driven by the shift from conversational AI tools to more advanced autonomous agents capable of performing tasks independently. The current disruption fears centre on several themes. Investors are worried about new competition from AI-native companies and incumbents that have rapidly improved their AI capabilities. There is also growing concern that enterprises may increasingly adopt their own “DIY” AI solutions, using AI agents to automate tasks that previously required third-party software. While most analysts expect the future software landscape to remain a mix of established players and new AI-enabled challengers, the competitive environment is clearly changing, with success likely to depend on product complexity, domain expertise, customer base scale, and access to proprietary data.

What are the positive market fundamentals amid the current volatility?

• Underlying company fundamentals have not deteriorated. Earnings across the software sector have continued to move higher, with analysts revising forecasts upward—normally a supportive backdrop for share prices. Nevertheless, valuations have compressed sharply, with the sector’s 2026 pricetoearnings multiple falling from 31x in October 2025 to 24x today. However, it is worth remembering that all this innovation will mean more automation and greater penetration of IT in production process. For the software industry this means volume growth.

The week ahead: what to watch out for

Despite this internal volatility in equity markets, the overall backdrop for financial markets continues to improve. Economic growth is holding up, monetary and fiscal policy are broadly supportive, and companies are delivering strong profit growth, creating a constructive environment for risk assets as 2026 progresses.