From geopolitics to profits: a week of relief, resilience and restraint
Are investors too skeptical?
Strip out the noise and the backdrop for earnings looks unusually strong. Recent economic surprises have been positive, revisions are trending higher and growth is broad-based across sectors. The Citi Economic Surprise Index has reached its highest level since late 2023, confirming that the U.S. economy has entered this period with more momentum than expected.
The economic cycle itself is improving. Manufacturing has emerged from a multi-year contraction, the service sector is accelerating and leading indicators globally are turning higher. Earnings revisions for 2026 are running well ahead of historical trends, and Wall Street consensus has been calling for double-digit growth again this quarter.
If these analysts are correct, this would mark six consecutive quarters of double-digit earnings growth — something we have not seen since the recovery that followed the global financial crisis.
And yet, positioning does not reflect this. Investor exposure remains closer to levels typically seen when earnings are falling, not accelerating. Strong fundamentals are in place, but investors have still not fully bought into the story these are telling.
What does the ceasefire signal tell us about recovery ?
The ceasefire in the Middle East, however fragile, was enough to trigger a sharp reaction in some of the most-affected sectors. Airlines led the move, with stocks surging double digits as oil prices pulled back from recent highs. This was a clear example of how quickly markets can reprice when the pressure valve is released. Fuel costs had surged, margins were squeezed and expectations had been reset lower, but even a partial normalization in oil was enough to improve the outlook. That said, the recovery will not be immediate. Fuel prices remain elevated, supply disruptions are still working through the system, and pricing pressures will likely persist. But the direction of change matters more than the level.
How will the Fed respond to sticky inflation?
U.S. core personal consumption expenditures (PCE) data came in with a gain of 3%, exactly as expected, with headline inflation at 2.8%. Monthly gains were firm, but not accelerating beyond expectations. In other words, inflation remains above target, but it is not reaccelerating out of control. Consumer spending held up, rising 0.5% on the month, even as income dipped slightly. Growth, however, has shown signs of moderation, with gross domestic product (GDP) revised lower for the fourth quarter. This leaves the U.S. Federal Reserve (the Fed) in a familiar position. Inflation is still too high to declare victory, but the economy is not strong enough to justify further tightening. Add in the uncertainty from energy prices and geopolitics, and the result is a central bank that is likely to remain patient. Markets are slowly adjusting to that reality. The bar for rate cuts remains high, but the bar for hikes is even higher.
Will earnings live up to expectations?
Looking ahead, earnings season begins next week and will quickly take center stage. With macro data holding up and positioning still cautious, the setup is constructive. If companies can deliver on expectations, fundamentals may finally start to close the gap with sentiment.
Listen to the latest podcast from the IG Investment Strategy Team for further insights.
