When Earnings Matter More Than Headlines

Investors today face no shortage of distractions.

From geopolitical tensions in the Middle East to ongoing political and economic uncertainty around the world, there is a constant stream of headlines competing for attention. Yet despite this backdrop, equity markets continue to push higher.

This raises an important question: what are markets actually focused on?

From my perspective, investors are increasingly looking through the geopolitical noise and paying closer attention to an unusually strong earnings growth cycle.

If we look at the S&P 500, earnings forecasts have continued to move higher throughout the year. Analysts are currently projecting 26% earnings growth into 2026 – an exceptionally strong number by historical context. What makes this particularly noteworthy is that we are not coming off the back of a recession.

Historically, earnings growth of this magnitude has tended to follow periods of economic weakness, when companies are recovering from a depressed base. Today, that is not the case. Corporate earnings were already growing at a healthy rate last year, and expectations continue to be revised upwards.

That makes the current environment highly unusual.

In fact, it is one of the strongest earnings backdrops I have seen in my career.

A significant driver of this growth is the investment cycle taking place around artificial intelligence and data centre infrastructure. While much of the public attention has focused on AI applications and the companies developing them, the underlying infrastructure build-out is having a meaningful impact across the broader technology ecosystem.

The semiconductor sector has been a major beneficiary.

More than half of market returns this year have come from semiconductor companies. While investors naturally focus on businesses such as NVIDIA and AMD, the strength extends well beyond those names. Memory semiconductor companies, in particular, are experiencing explosive earnings growth and upward estimate revisions by analysts as demand for computing power continues to outstrip available capacity.

Across the industry, management teams consistently point to capacity constraints and an inability to satisfy all existing demand. That suggests the underlying investment cycle remains robust and continues to support earnings growth across the value chain.
What is particularly interesting is that, despite strong share price performance, many investors remain sceptical about the durability of the cycle.

In some cases, companies that have delivered extraordinary earnings growth continue to trade on relatively modest valuation multiples. This suggests the market is not fully convinced that current conditions will persist.

In my view, that scepticism is healthy.

Periods of excessive speculation are typically characterised by widespread optimism and ever-rising valuations. Today, I still encounter more scepticism than enthusiasm when discussing the outlook for this cycle. The market is recognising the earnings opportunity, but many investors remain cautious about how long it can last.

That is an important distinction.

It is easy to look at markets trading near all-time highs and conclude that valuations have become detached from reality. Yet the current picture is more nuanced. Earnings growth is keeping pace with, and in many cases exceeding, share price appreciation.

As a result, forward valuation multiples have remained relatively stable and, in some areas, have even compressed as earnings expectations have increased.

That is not typically the hallmark of a speculative bubble.

There are, of course, risks. Market leadership has been narrow, and investors without exposure to the areas driving earnings growth may have experienced very different outcomes from the broader indices. This remains a challenging environment for active investors and stock pickers.

However, I would caution against assuming that a strong bull market automatically means markets have become overextended.

The more important question is what is driving the market higher.

We are witnessing an arguably unprecedented investment cycle (for most of our careers) and industrial recapitalisation centred on AI infrastructure, data centres and semiconductors – in the US in particular. Importantly, it has policy support from government too, with the Trump administration announcing a swath of investments and co-investments into tech companies to encourage reshoring of high-tech manufacturing. For the time being, it continues to support earnings growth across large parts of the market and remains the dominant force shaping market returns.

While headlines will continue to change from day to day, investors would do well to remember that markets are often focused on something deeper. Right now, that focus appears to be firmly on corporate earnings.