Earnings forecasts rise as investors look past geopolitical noise

In the latest monthly update, our Chief Investment Officer, Richard Flax, explores how markets are navigating geopolitical tensions amid strong earnings forecasts and energy pressures. You can also find a written version of his commentary below.

It’s been a really interesting few weeks in financial markets. The conflict in the Middle East seems to have de-escalated, but the Strait of Hormuz isn’t really open and the oil price is still sitting close to $100 per barrel. At the same time, we’ve seen a pretty solid rebound in equities so far in April and that’s generally helped portfolios. 

So, how should we think about this? There are a few points to make. The de-escalation is obviously positive, even if negotiations continue to drag on. But the oil price remains well above where it was at the end of February and that is hitting households and businesses. We’ve already seen higher inflation readings in the US and Europe on the back of higher energy prices. We think that we’ll see higher prices elsewhere the longer those higher energy costs persist. At the same time, the latest macro data hasn’t been particularly weak – retail sales in the US, for instance, held up pretty well in March, suggesting that overall US consumers haven’t yet reined in their spending. 

The second point is around earnings. Earnings forecasts for this year across most markets have continued to rise over the past few weeks. Analysts continue to expect double-digit earnings growth across most markets. The latest earnings releases seem to support that optimistic assessment. In the US, so far, the percentage of companies beating expectations has been higher than average. If we do see double-digit earnings growth in the US this quarter, it would mark the sixth consecutive quarter of double digit growth. 

So, there’s this tension between the geopolitics, which has de-escalated. Energy prices, which remain high. And corporate earnings, which look pretty resilient. In April, resilient earnings have won out, and equities rallied. It’s worth highlighting that we saw US tech leading the charge in April, after a few lackluster months. The combination of strong earnings growth and a de-rating in tech valuations has caught investors attention, pushing concerns about an AI bubble to one side.

Questions for the month

In terms of key questions, we’ve really had two. How long will energy prices stay high and how big an impact will they have on the global economy and markets.

In terms of energy prices, it looks like they’ll be staying higher for longer, even if the conflict continues to de-escalate. That means we’ll likely see inflation stay higher than Central Banks would like. Will that mean higher rates? We think it probably means fewer cuts rather than higher rates, but central bankers will be looking for signs that inflation is accelerating more broadly. 

In terms of equities, we think while we continue to see strong earnings growth, investors can continue to look past the geopolitical noise, even if a lot of the higher expectations are focused on tech and energy.