A focus on earnings also helps investors avoid the danger of trading on volatile newsflow. The recent market recovery highlights the importance of staying invested and shows the opportunities that can be seized upon by fundamental equity investors when valuations drop.
The Q1 season also revealed the level of nervousness around equities amid geopolitical uncertainty. The share prices of companies that missed expectations were hit harder than they have been historically, while optimistic guidance was rewarded. This shows the value of in-depth company knowledge during times of volatility.
Here are three areas that caught our eye during the recent earnings season, all of which we believe are fertile areas of active opportunity:
1. Big tech defies the doubts
Earnings for the “Magnificent 7” grew around twice as much as those of the S&P 500, as big tech shook off any doubts that began to emerge after the Chinese “DeepSeek” artificial intelligence (AI) model demonstrated impressive performance in January.
We believe AI is a powerful long-term investment theme that will evolve and present opportunities for skilled stock pickers. Big-tech capital expenditure on AI investment showed no signs of slowing down in Q1. Some of the hyperscalers, such as Meta and Amazon, announced that capex was accelerating, while Microsoft and Google reiterated forecasts. We estimate the total for all hyperscalers for 2025 will be more than $370 billion, up from $230 billion in 2024, while operating cash flows stand at $739 billion. Crucially, hyperscalers are beginning to see returns on investment. Meta CEO Mark Zuckerberg said, “AI is transforming everything we do.”
This investment is likely to flow through all areas of the AI technology stack, from data centers and power generation up to software and applications. Our tech team expects software companies to benefit as the technology becomes more readily available.
The DeepSeek news and recent tariff tumult show that many companies in this space were priced for perfection. Yet recent pullbacks have presented opportunities for long-term investors to lean into the AI theme at an attractive price.
2. How about healthcare?
Healthcare earnings jumped by 44% versus Q1 2024, as positive developments were seen across subsectors from pharma to insurance. Yet uncertainty surrounds the sector due to government announcements on drug prices and volatile tariff policies.
Most of the uncertainty concerns large-cap pharmaceutical companies, an area we have been underweight due to the persistent risk of patent cliffs. We prefer to lean into companies that specialize in medical devices and supplies, which benefit both from the stable earnings growth driven by ageing populations, as well as growth spurred by innovation. Some of the innovations here include AI-powered surgical robots, minimally invasive platforms and smart wearables.
Our healthcare analysts also spend a lot of time researching how trade uncertainty may hit healthcare earnings. Drug distribution companies, such as Cencora and McKesson, may be less impacted by tariffs than the broader sector.
And many of these opportunities are available at an attractive price, in our view. Healthcare remains cheap, at a 30% discount versus the S&P 500 – whereas historically healthcare stocks have traded at a premium to the market.
3. A focus on financials
The best performing sector globally in 2025 has been the financial sector, driven by the continued boost from higher interest rates. U.S. financials delivered solid, if unspectacular, results in Q1 2025, growing earnings by just more than 6%. Despite these slightly lacklustre numbers, we believe momentum in the sector can continue, and our global financials team remains overweight the U.S. versus other regions. Economic activity and interest rates are in the sweet spot for bank profitability; increased investment is driving loan growth and capital market activity; and operating costs in the industry are decreasing on the back of AI adoption.
Bottom line
I wrote one quarter ago that U.S. “exceptionalism” was still alive and well. The subsequent months of market volatility caused many to question this label. The latest earnings season once again demonstrated the persistent strength of U.S. companies, and we believe there are opportunities across sectors to find quality companies capable of thriving even in periods of great uncertainty.
