Investment Viewpoint: Earnings strength drive markets

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Markets and macro insights with Bernard Swords, Chief Investment Officer

Key takeaways

1. Equity markets were the primary driver of returns this week, supported by strong corporate earnings and improving investor sentiment.
2. US earnings momentum remains very strong, while Europe is more subdued due to a less favourable sector mix and weaker economic conditions.
3. Economic data reinforce a divergence between the US and euro area, with resilient US growth contrasting with a more challenging European outlook.
4. Portfolio positioning remains appropriate – and is built for a world where global growth runs modestly below trend.

Financial markets had a strong and encouraging week – what were the main drivers of performance?  

• Equity markets were the main driver of returns, rising by more than 2% in euro terms, while bond markets also improved, with 10‑year government bond yields in the euro area dipping below 3%.
• Part of this positive momentum reflects perceived progress in negotiations in the Middle East. While developments continue to move in fits and starts, the overall direction still appears to be towards de‑escalation and, ultimately, resolution, which has helped improve investor sentiment.
• For equity markets, however, the most important driver of performance remains the strength of the corporate earnings season. Sector performance this week highlighted this clearly.
• The strongest performers were the “new economy” sectors, particularly information technology and communication services, alongside materials, where earnings results have also been notably strong. These sectors tend to have less direct exposure to energy market pressures, which is proving supportive.
• By contrast, the weaker performers were energy‑related sectors such as utilities and energy itself, while traditionally defensive areas like consumer staples and healthcare also came under pressure during the week.

Can you provide an update on the Q1 earnings season in the US and Europe?

• The first‑quarter earnings season in the United States continues to be very impressive. With close to 80% of companies now having reported, earnings growth is running at around 23% year on year. This is approximately 18 percentage points higher than expectations at the start of the reporting season.
• While technology and communication services companies have made a significant contribution to this strength, it is broad‑based: eight of the 11 major sectors are delivering double‑digit earnings growth. This is supported by very healthy sales growth of around 10% year on year.
• Overall, while there may be debate about the economic cycle, the profit cycle in the US looks exceptionally strong and continues to build momentum. Another encouraging sign is that more companies are upgrading their outlooks than downgrading them, underlining management confidence in underlying business conditions.
• Meanwhile, the picture in Europe is more subdued. In the euro area, earnings growth is running at around 4% year on year, broadly in line with forecasts. However, excluding the energy sector, results are generally falling short of expectations. A less favourable sector mix, lower exposure to fast‑growing new‑economy sectors, the still‑strong euro on a year‑on‑year basis, and weaker domestic economic conditions are all weighing on the euro area earnings profile.

Recent economic data continues to point to a divergence between the US and the euro area. What were the key data releases?

• In the US, the most notable release was the non‑farm payrolls report, which showed job creation well ahead of expectations, with more than 100,000 jobs added in April.
• While this suggests the US economy remains resilient, wage growth was more subdued, running at around 3.8% year on year. This combination points to an economy that is growing steadily but not overheating.
• The ISM Services Index eased slightly, reflecting some softness in new orders, but at 53.6 it remains firmly in expansionary territory.
• In contrast, the euro area data paint a weaker picture. Retail sales volumes declined month on month, with annual growth just above 1%.
• Importantly, the full impact of higher energy prices has yet to filter through, suggesting further pressure on activity ahead. As a result, the outlook for economic data in the euro area remains challenging.

The week ahead: what to watch out for

This week will bring a range of important economic data releases. In the US, we will see figures for retail sales and industrial production, alongside inflation data including both consumer and producer prices. China will release inflation data, while the euro area will publish industrial production figures. Together, these releases should provide further insight into how current energy prices are affecting economic activity and inflation across the global economy.