Key points.
- The first quarter results confirm continued double-digit profit growth, despite the energy shock that is fueling inflation fears and making the trajectory of key interest rates more difficult to predict.
- Strong US results remain the main driver of global growth: margins are reaching multi-year highs and projections are broadly on track, with further upward revisions to capital spending on technology and AI. Europe is also posting better-than-expected results, although the pace of growth is more moderate.
- Emerging markets offer faster earnings growth and more attractive valuations than developed markets, as well as exposure to the AI investment spending cycle.
- We favour a diversified and selective exposure to equities, with an overweighting of emerging markets.
Just two months ago, the decline in inflation suggested favorable macroeconomic winds, in the form of lower interest rates, improved corporate performance, and a diminishing impact from tariffs. Since then, the energy shock and inflationary fears have dampened expectations of a more accommodative monetary policy, although this has not yet been reflected in earnings estimates, which remain robust. We favor a diversified and selective exposure and reiterate our positive outlook on emerging market equities.
In the United States, first-quarter results significantly exceeded expectations: 80% of companies surpassed forecasts, resulting in a sixth consecutive period of double-digit growth. Since the end of 2021, this is only the second earnings season in which analysts have raised their forecasts prior to earnings releases. Despite increasing geopolitical uncertainty, stock markets are performing well. The new highs reached by global equities are based on solid earnings growth, driven by the technology, financial, and materials sectors. However, this growth remains largely dependent on investment in the technology sector and the potentially delayed impact of the energy shock on demand.
Globally, the information technology (IT) sector is poised to generate more than half of the overall first-quarter earnings growth, driven by capital expenditures related to artificial intelligence. On April 29, the results of four of the “Magnificent Seven” alone contributed nearly 10 percentage points to the combined (estimated and reported) earnings growth of the S&P 500, as these companies continued to outperform the rest of the market. US hyperscalers and neo-cloud providers—the global network operators of data centers—raised their AI investment forecasts to over USD 800 billion (representing 70% growth by 2026) and nearly USD 1 trillion by 2027. This increase reflects the expansion of data centers and rising costs for memory and components. These companies report accelerating AI sales, increased return on investment, and demand for cloud and enterprise software that, so far, has remained unaffected by rising energy prices and geopolitical uncertainties. The growing signs of AI monetization reinforce analysts’ forecasts, which anticipate a 62% increase in IT sector profits this year, as measured by the MSCI All Country World index.
In the United States, first-quarter results significantly exceeded expectations: 80% of companies surpassed forecasts, enabling a sixth consecutive period of double-digit growth.
This resilience, combined with continued upward revisions to earnings forecasts, is allowing stock markets to rise despite uncertainties related to the energy shock and its impact on inflation and monetary policy. Furthermore, management teams have, for the most part, confirmed their projections despite the volatile news.
Profit margins remain exceptionally high, with net margins close to 14.5%, their highest level in about fifteen years, driven primarily by the technology, financial, and utilities sectors. Sector composition is key because it combines the structural pricing power of major technology platforms, the cyclical resilience of financial stocks, and the defensive stability of regulated utilities’ profits. It also helps explain why margins can remain robust despite rising energy prices.
Supply chain constraints amplify this cycle by increasing hardware costs and lengthening delivery times, which can benefit AI infrastructure providers. This is a key reason why technology is driving upward profit revisions; demand in the AI supply chain is robust enough that constraints are actually improving revenue and margin visibility, rather than hindering it.
For large technology platforms, energy exposure is more related to electricity than oil, and data center operators often enter into long-term power purchase agreements, mitigating the impact of rising costs. The most significant risk lies in monetary policy. If energy-related inflation keeps the Federal Reserve on pause for longer, support for equity valuations could erode. This is not our base-case scenario, but it is the one that would most clearly test the ability of earnings to support equity markets.
Net margins are close to 14.5%, their highest level in about fifteen years.
Recent statements from the Fed suggest that rate cuts are unlikely in the near term. We still anticipate one by the end of the year, contingent on a slowdown in the US labor market and a mitigation of current shocks. This is important because US equities have only a limited valuation buffer: with a forward price-to-earnings ratio of around 21x, future performance will likely depend more on continued earnings growth than on multiple expansion.
An expansion of performance, but not enough to ignore concentration
Beyond technology stocks, encouraging signs are emerging: nine of the eleven sectors posted positive growth. Technology and materials outperformed the overall market, while a decline in earnings is anticipated for the healthcare and energy sectors, leaving room for positive surprises. Financial stocks delivered solid growth, supported by strong capital markets, resilient consumer momentum , and good credit quality. Certain segments of the communication services, industrials, and materials sectors also contributed.
Consumer-facing sectors remain more sensitive to rising energy prices and slowing monetary easing – without yet having seen downward revisions to earnings. In this context, even strong results may not be enough to drive up share prices if valuations are already high. Consequently, the market is currently focused on determining whether earnings justify valuation levels.
Our positioning reflects this balance. We remain neutral on US equities as a whole, but information technology is our highest conviction sector within developed markets, as the AI investment spending cycle continues to offer exceptional visibility on revenues and margins, at still attractive valuation levels.
We also maintain a positive view on utilities, which should benefit from increased electricity demand related to data center expansion, as well as on the healthcare sector. The latter has posted weak earnings this season, but we consider this a temporary situation, with potential for a recovery in estimates and valuations as political risk eases and new products gain visibility. Expectations of higher interest rates have also weighed on valuation multiples.
The first-quarter earnings season has been more subdued in Europe than in the United States, but surprisingly strong so far.
A moderate European dynamic excluding energy
The first-quarter earnings season was more subdued in Europe than in the US, but surprisingly strong so far, driven by the financial, energy, and technology sectors. That said, only half of the companies beat expectations. Earnings revisions were primarily fueled by energy, materials, and technology, masking a more general weakness. Overall, better-than-expected European results were less highly valued by investors, and underperforming results were more severely penalized. The region is most exposed to the energy shock and disruptions to global trade. Analysts still anticipate earnings growth of around 13%; we expect a pace closer to 6%.
Furthermore, the weak dollar provided a tailwind for US earnings, by about two percentage points, and a similar headwind for Europe. Overall, we therefore remain neutral on the eurozone, given reasonable valuations and clear risks to earnings momentum.
Accelerated profits in emerging markets
We maintain a positive view on emerging markets, which offer both faster earnings growth, a valuation cushion, and direct exposure to the same AI investment spending cycle that is fueling US outperformance, but at a more reasonable price. After a disappointing fourth quarter, earnings growth accelerated in emerging markets, with companies exceeding earnings expectations alongside revenue and margin expansion.
The most significant change concerns companies driving profit growth in emerging markets. The AI infrastructure expansion cycle is becoming increasingly dominant, with 80% of growth concentrated among semiconductor exporters, particularly South Korean and, to a lesser extent, Taiwanese, as supply bottlenecks support their pricing power.
Beyond IT, raw materials also contribute to the profits of emerging markets, benefiting energy and materials exporters like Brazil and South Africa. However, this is not a uniform situation. China and India continue to face challenges: China still suffers from weak consumption and margins in competitive sectors, even though the IT sector and robust exports partially offset these difficulties, while India has been affected by significant disruptions to air traffic and rising energy prices. Selectivity therefore remains essential.
We therefore remain neutral on the eurozone, given reasonable valuations and obvious risks weighing on earnings dynamics.
This earnings season and its optimistic projections explain why global stock markets are managing to rise despite the uncertain macroeconomic environment. However, the reports also highlight the market’s vulnerabilities: earnings strength remains excessively dependent on capital expenditures related to AI and a relatively limited set of technology-driven themes.
From our perspective, the right investment strategy is neither to ignore the stock market rally nor to chase indices indiscriminately. In a context of high valuations and less certain interest rate cuts, positive performance increasingly relies on upward revisions to earnings and sustainable margins, rather than further increases in valuation multiples. This is why we favor a diversified and selective equity exposure, remain neutral on the US market as a whole while favoring information technology and utilities within developed markets, and maintain a positive outlook on emerging markets where exposure to AI providers is possible at more attractive valuations.
