The gulf between sentiment and reality was already wide at the beginning of the year. The ongoing conflict in the Middle East has enlarged the incongruity between perceived risks and equity markets at all-time highs. Market resiliency is even more notable when considering the headwind of ongoing tariff uncertainty and a significant hawkish shift in central bank expectations. Earlier in the year, markets were pricing in, up to three 25 basis point interest rate cuts by the U.S. Federal Reserve for 2026; however, inflation worries have wiped these off the calendar. Yet, rather than stumbling, the S&P 500 continues to trade near record levels.<\/p>\n
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Based on a Goldman Sachs study of past geopolitical crises, which showed markets initially reacting negatively then recovering to pre-crisis levels within two months, today\u2019s market behaviour appears to be following a similar script. As in previous crises, changes to the outlook for economic and corporate fundamentals are critical to market performance. While additional chapters remain in the current conflict, robust underlying corporate earnings and rising forward estimates are providing fundamental support to equity markets.<\/p>\n
\u00a0<\/strong><\/p>\n Q1 earnings: the proof is in the profits<\/strong><\/p>\n As Q1 2026 reporting season draws to a close, the results have been nothing short of exceptional. With over 90% of S&P 500 companies having reported, quarterly revenue is tracking +10.5% year-over-year while earnings are +25.3%, according to data from Bloomberg. S&P 500 consensus year-over-year earnings growth expectation for full year 2026 has accelerated to +21% as of May 11 compared with an expectation of +12% in early January.<\/p>\n <\/p>\n The source of these strong earnings is three-fold.<\/p>\n <\/p>\n First, the highest operating margins in 40 quarters could be early signs of productivity gains from Artificial Intelligence (AI) adoption. While margin improvement is strongest in the technology sector, gains are being experienced in most of the market\u2019s 11 subsectors.<\/p>\n <\/p>\n Second, the relentless spending on technology infrastructure remains a secular tailwind. The transition from a narrow “Magnificent-7” leadership to a broader market hasn’t stopped the flow of capital into data centres and semiconductor hardware. Based on Q1 commentary from large hyperscalers like Google, Amazon, and Microsoft, demand from AI users continues to outstrip supply, fueling unprecedented growth in capital expenditures.<\/p>\n <\/p>\n Third, a resilient consumer continues to defy the malaise of sentiment surveys. While consumers report feeling pessimistic, their spending behaviour particularly in the U.S., remains robust according to the weekly Johnson Redbook retailer survey that shows year-over-year sales increasing at a 7.8% pace (for week ending May 2). A relatively low U.S. unemployment rate of 4.3% (versus 20-year average of 5.8%) is undoubtedly contributing to healthy consumer spending. Finally, while crude oil above US$100\/barrel stokes headlines and weighs on the consumer psyche, current oil prices are approximately 30% below historical peaks on an inflation-adjusted basis.<\/p>\n \u00a0<\/strong><\/p>\n U.S. equity market is leading once again<\/strong><\/p>\n After a brief period of underperformance in 2025, the U.S. equity market has resumed its long-term trend of outperforming its developed international peers, including Canada. This dominance is rooted in two structural advantages:<\/p>\n <\/p>\n Technology weighting: The S&P 500’s high concentration in technology and growth-oriented sectors allows it to benefit disproportionately from the AI revolution. International indices remain more heavily weighted in legacy sectors, such as financials and industrials, which, while stable, lack the same growth profile.<\/p>\n <\/p>\n Energy independence: In an era of US$100\/barrel oil driven by Middle Eastern conflict, the U.S. stands as the world’s largest producer of oil and gas. Unlike Europe or parts of Asia that are vulnerable to supply shocks, the U.S. economy possesses a built-in hedge that protects its industrial base from supply constraints.<\/p>\n <\/p>\n Earnings pillar capable of withstanding risks<\/strong><\/p>\n Despite our optimistic stance, we are mindful of the downside risks that persist. The longer oil prices remain elevated, the greater the risk that consumers succumb to inflationary pressure. While there is only a remote chance of interest rate hikes over the next 12 months, longer-term interest rates have already drifted higher from the beginning of the year and could continue to weigh on housing and industrial investment. Finally, equity market resiliency has resulted in valuation multiples rebounding toward the high end of historical ranges.<\/p>\n <\/p>\n We continue to think that 2026 equity returns will come mostly from earnings growth as valuation multiples have little room to expand further. Judging by Q1 results to date and rising estimates for 2026 and 2027, the earnings growth pillar is withstanding many of the risks outlined above. We are also encouraged by broad market participation year-to-date. The fact that small-cap stocks and equal-weighted indices are participating in this rally suggests healthy fundamentals.<\/p>\n <\/p>\n After raising equity exposure within our balanced portfolios during the first few weeks of the conflict, we have recently returned to a neutral positioning. We remain constructive on equity markets over the remainder of 2026, particularly the U.S. where we hold a regional overweight position. We expect elevated volatility should yield additional opportunities and we are prepared to make further portfolio adjustments as opportunities arise.<\/p>\n <\/p>\n","protected":false},"excerpt":{"rendered":" The gulf between sentiment and reality was already wide at the beginning of the year. The ongoing conflict in the Middle East has enlarged the incongruity between perceived risks and equity markets at all-time highs. Market resiliency is even more notable when considering the headwind of ongoing tariff uncertainty and a significant hawkish shift in […]<\/p>\n","protected":false},"author":255,"featured_media":3634,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_oasis_is_in_workflow":0,"_oasis_original":0,"_oasis_task_priority":"","_exactmetrics_skip_tracking":false,"_exactmetrics_sitenote_active":false,"_exactmetrics_sitenote_note":"","_exactmetrics_sitenote_category":0,"footnotes":""},"categories":[25],"tags":[],"class_list":["post-3632","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-love-letters"],"yoast_head":"\n