Investment Viewpoint: Earnings resilient despite ongoing geopolitical risk

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Markets and macro insights with Bernard Swords, Chief Investment Officer

Key takeaways

1. April ended quietly, but overall, the month was strong for investors. Equities edged higher late in the month, while bond markets stayed under pressure.
2. Equities surged in April, driven mainly by strong earnings, especially in the US. Information Technology led and Communication Services followed.
3. Bond markets are being weighed down by inflation concerns linked to the Middle East conflict and higher oil prices.

What was the overall picture from financial markets in April?

• April delivered a very strong outcome for equity investors. While government bond yields probed new highs for the year on concern about inflation and interest rates, world equites returned 9.5% in local currency terms and over 8% when measured in euro. Equities initially rebounded from their March lows, helped by reports of a ceasefire in Iran, and then accelerated higher as company earnings reports for Q1 delivered well ahead of expectations. This resilience in corporate performance has been the key support for equity markets, demonstrating continued ability to grow profits despite geopolitical uncertainty and rising input costs.

Which sectors led markets in April?

• Performance across equity sectors has been uneven, with a clear leadership from the so called “new economy” areas. Information technology stocks were the standout performers during the month, rising by around 19%, while communication services gained approximately 14%. These sectors continue to benefit from long term structural growth trends. In addition, more cyclical sectors, which had been hit hardest during market weakness in March, staged a notable recovery in April. By contrast, energy related sectors and more defensive areas such as utilities lagged behind the broader market.

What has been driving bond markets?

• Bond markets continue to grapple with inflation concerns stemming from the ongoing conflict in the Middle East. Oil prices have moved back towards the highs seen earlier in the conflict, as global supply conditions have tightened and disruption to key transit routes has persisted. With elevated energy prices now lasting longer than originally expected, inflationary pressures appear likely to remain higher for longer. While the full impact on underlying, or “core”, inflation has yet to be seen, the risk has clearly increased and remains an important factor influencing market sentiment.

What is behind the divergence in economic momentum between the US and the euro area?

• Recent GDP releases from both the US and the euro area fell slightly short of expectations at the headline level. In the US, however, the disappointment masked a more positive underlying trend. Stronger than expected imports weighed on GDP calculations, but domestic demand remains resilient and business investment is continuing to accelerate, suggesting that the US economy still has solid momentum. The picture in the euro area has been weaker, with growth slowing from an annualised rate of 1.4% in the final quarter of last year to 0.8% in the first quarter. More recent sentiment and confidence indicators published in April suggest that economic momentum in Europe may soften further as higher energy costs weigh on households and businesses. This divergence between regions highlights how the impact of the energy shock is being felt very differently across the global economy. The euro area, which is more exposed to imported energy costs, is experiencing more significant headwinds, whereas the US economy has so far proven more resilient.
• Inflation data released during the month reflected these pressures. As expected, headline inflation picked up in both the US and the euro area due to higher energy prices. Encouragingly, however, core inflation eased slightly in both regions. While higher energy costs are likely to have some knock on effect over time, the fact that core inflation was decelerating heading into this period provides an element of comfort.

The European Central Bank (ECB) and the US Federal Reserve have left rates unchanged, what signals are policymakers focused on?

• Policymakers in the ECB and US Fed continue to stress the importance of incoming economic data, but the overall tone suggests a gradual shift towards higher interest rates, particularly in the euro area over the next 12 months. In the US, while rates were left unchanged, commentary from policymakers has become firmer, reflecting ongoing concerns about inflation risks.

Given this backdrop, how have markets performed?

• Equity markets have performed far better than might have been expected given the scale and duration of the geopolitical uncertainty. Strong corporate earnings have been the decisive factor, especially in the US, where profit growth is running well ahead of expectations and forecasts continue to be revised upward. European earnings are also growing, albeit at a more modest pace. Importantly, earnings growth is not confined to just one or two sectors. Most sectors are now reporting double digit earnings growth, and this breadth reduces sensitivity to fluctuations in energy prices.
• That said, higher energy prices are likely to weigh on global economic growth. Global GDP growth could move towards 2.5%, which is modestly below our expectations at the start of the year. This implies a global economy growing below trend, but still well away from recession. This environment is broadly consistent with how portfolios have been positioned. We had anticipated a period of slower but more stable growth as we move through 2026 and 2027, and recent developments are bringing conditions closer to that outlook.

The week ahead: what to watch out for

The main focus this week is the US Non Farm Payrolls report. Given recent volatility in the data, we will be looking for evidence of an emerging underlying trend. The ISM Non Manufacturing survey will also be released. In the euro area, attention will turn to retail sales, industrial production, and producer price inflation. Meanwhile, the ongoing corporate earnings season will remain an important backdrop for markets.