Beyond the Noise

Amidst all the rhetoric on Iran and yet another swing in the oil price, it’s easy to forget that we are in the middle of earnings season. So far about a third of the S&P 500 has reported and nearly 90% have beaten EPS estimates. Q2 earnings growth is now approaching 47%, the strongest since the post-Covid rebound in 2021.

One encouraging feature is that earnings strength isn't confined to AI. Strong reports have also come from financials, energy, communication services and industrials. Of course, some companies have struggled to keep up with lofty expectations, particularly in semiconductors. However, the SOXX index is still up more than 60% this year, suggesting the recent weakness looks more like a healthy correction than a change in trend.

Nor is earnings season the only source of encouragement. The recent intervention to stabilise the yen has eased fears of another carry-trade unwind, inflation continues to moderate across much of the developed world and credit markets remain remarkably calm. Even Europe, so often the laggard, is on course for its strongest earnings season in several years.

Does this mean markets are on course for the second half of the year to be as strong as the first? Not necessarily. The war in the Middle East remains unresolved, the US mid-term elections are looming, and central banks are unlikely to declare victory over inflation just yet. But with profits growing and financial conditions remaining supportive, the fundamentals may be stronger than the headlines suggest.