Weekly market commentary

U.S. stocks are hitting records amid ongoing Middle East supply disruptions. A key reason behind their outperformance? Strong corporate earnings that are being revised higher yet. Mega cap tech remains the dominant driver, while broad earnings growth looks healthy in a still resilient U.S. economy. And AI is now delivering tangible revenues, allaying worries over outsized capital spending. We’re overweight U.S. and EM stocks on the accelerating AI buildout as a result.

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Upward earnings momentum
S&P 500 earnings growth revisions in percentage points, 2022–2026

U.S. earnings are on a roll. A trend of upward revisions to S&P 500 earnings growth in 2025 has spilled over to 2026 – an atypical path given that analysts usually revise their expectations down as the year progresses. See the chart. What’s behind the momentum? Earnings growth is still led by the “magnificent seven” megacap tech stocks: They make up about a third of the S&P 500’s market capitalization and account for 55% and 37% of total expected earnings growth this quarter and year, respectively. The broader earnings backdrop looks healthy as well. Materials and energy have seen earnings upgrades as the Mideast conflict has pushed prices higher. It’s not just about future earnings: Some 83% of S&P 500 companies have beaten profit estimates by an average of 11% this quarter, with two-thirds having reporting. The average company has increased earnings by 8% in the past year.

U.S. earnings momentum is gathering steam as mega forces – big structural changes such as geopolitical fragmentation and AI – are increasingly driving investment outcomes. These often manifest unevenly, and that’s reflected in stock returns. Take geopolitical fragmentation: Europe and parts of Asia are vulnerable to Middle East supply disruptions, stoking inflation and weighing on growth. The U.S., by contrast, is more shielded as a net energy exporter, while EM energy and commodity exporters in Latin America are benefiting. This is partly why the U.S. has been leading equity market gains to record levels since the war’s start, with the S&P 500 up 5 % vs 5% and 4% declines in European and Japanese stocks, respectively.

A strengthening AI mega force

Another key reason for U.S. equity fortitude: The AI mega force is strengthening. To be sure, it’s no longer the tide that lifts all boats. Markets are focused on how AI will change business models and are searching for signs that record spending on data centers, chips and human capital is starting to pay off. This is driving differentiation in stock returns. Last week’s Big Tech earnings showed companies are raising their already lofty capex plans, with the market rewarding those controlling key pieces of the underlying technology that are also proving they can convert spending into profits. The capex bonanza highlights surging demand for AI infrastructure, benefiting semiconductors and hardware in Taiwan and South Korea.

All this underpins our preference for U.S. and EM equities. Active investors can also eye opportunities beyond the key players in the AI buildout. Examples are early AI adopters seeing efficiency gains in financials and selected healthcare such as imaging, diagnostics and documentation. Other potential beneficiaries of a market broadening include value and high dividend stocks, where wide discounts and attractive income could spur a valuations rebound. We favor thematic opportunities amid a fragmenting world in search of energy security: infrastructure and defense in Europe and beyond.

Our views are dependent on the reopening of the key shipping channel of the Strait of Hormuz. If that doesn’t happen, even U.S. equities won’t be insulated, in our view. Similarly, the U.S. economy is likely to suffer if the latest spike in oil prices lasts.

Our bottom line

The AI theme and broadening earnings strength underpin our pro-risk stance. We’re overweight U.S. and EM equities on the accelerating AI buildout. We eye thematic opportunities across infrastructure, defense and energy.

Market backdrop

The S&P 500 notched a 10% gain for April, its best month since November 2020, driven by strong earnings momentum. The Fed and European Central Bank (ECB) left interest rates unchanged, as expected. The case for further Fed rate cuts has weakened, with policymakers showing less conviction and signaling greater caution on inflation. The labor market is not seen as a key inflation driver, increasing the risk of upside surprises as persistent wage growth could push core services inflation higher. The ECB, for its part, signaled rate hikes ahead.

We focus on U.S. labor data this week, with the U.S. jobs report and labor demand data key to confirming the resilient yet slow-moving labor market we’ve observed. We expect moderate job growth and stable layoffs. We also watch ISM manufacturing and euro area PMIs for signs of subdued industrial activity, and eye China’s trade data for any further weakness.

Read our past weekly market commentaries here.