SUMMARY
We believe the bull market in equities is poised to continue. Markets where EPS growth is stronger may lead the way.
KEY TAKEAWAYS:
As cycles mature, fundamentals become the preeminent driver of returns
We believe the U.S. is best positioned to deliver on elevated earnings growth expectations
We favor areas with fundamental momentum outside the U.S. and within specific industries
With 4Q25 earnings season kicking off, investors are acutely focused on the ability of companies within the U.S. and globally to deliver on a high bar this year.
Elevated earnings revision ratios – the ratio of upgrades to downgrades on forward earnings estimates – show that bar moving higher and have been most positive in the U.S., with Emerging Markets and Europe gaining momentum.
Given the multiple expansion in Europe last year, this earnings momentum will need to continue for fundamentals to support the now higher valuation there.
Meanwhile, earnings growth in the U.S. is expected to reach mid-double-digits this year.
The typical trend is for that estimate to move lower throughout the year as reports come in, yet analysts continue to revise that expectation higher for now.
This is a sign of fundamental bullishness we believe is achievable and necessary to drive this bull market higher as the cycle matures.
A variety of indicators, including the rebound in expectations for sales over the next six months from CEOs in the December Business Roundtable survey, point to continued earnings momentum.
The Tech sector is expected to drive over 50% of the net income growth for the S&P 500 this year as AI adoption continues – a story we believe may still be underappreciated.
We think maintaining core exposure to the areas of consistent, resilient earnings growth – U.S., Technology, Large cap companies – may be a viable strategy for investors comfortable with the risks over the long term.
However, we continue to believe in barbelling with exposure geared towards a strong nominal growth environment to help diversify performance rotations within equities.
This includes non-U.S. regions like Emerging Markets (Brazil and China), pockets of Materials with exposure to the AI supply chain, and industries like banks with strong fundamentals.
Bottom Line: Fundamentals drive price action over time, and we believe the strong nominal growth environment provides earnings tailwinds for regions and industries that have lagged U.S. Large caps over the long term.
We believe capturing some of this rotation while maintaining a core in secular winners may be an attractive long-term strategy for those investors comfortable with the risks.
