Earnings and AI spending drove markets as Fed paused
What’s happening this earnings season?
This earnings season is turning into something truly remarkable. Despite already elevated expectations, results are coming in well ahead of consensus across almost every major metric. S&P 500 earnings growth is now tracking close to 25% year-over-year for Q1, which would mark the strongest pace in roughly four years and arguably the most impressive earnings backdrops in decades, outside of post-crisis rebounds. It’s hard to remember a more impressive quarter in the last 20 years.
The AI boom is clearly part of the story, but the strength goes far beyond a handful of mega-cap names. Growth has been broad-based, with all 11 sectors posting positive earnings growth for the first time in four years. Median company earnings growth has also moved solidly into double digits, showing that it’s not just a small number of large companies doing the heavy lifting.
Importantly, strong profits are helping justify valuations that many investors viewed as stretched coming into the year. The market is not cheap, but earnings are rising fast enough to help the market gradually grow into those multiples.
Which AI companies are seeing high growth?
The AI trade is not calming down; it’s spreading once again.
AMD (Advanced Micro Devices, a U.S. semiconductor company) jumped after forecasting stronger-than-expected revenue on demand for data centre chips, helping push the broader semiconductor complex higher. Arm Holdings (a British semiconductor company) also guided above expectations, pointing to demand for energy-efficient chip designs tied to AI data centres.
Globally, the move has become even more powerful. The market is absolutely crazy for chips, any chips. Japan and South Korea are leading major markets, as investors continue chasing semiconductor exposure. South Korea is up massively this year, while Japan’s Nikkei also surged this week on the back of the same AI momentum.
Can the market can keep rewarding every layer of the supply chain without eventually asking harder questions about price, margins and returns? This question has been on our mind for months if not years, and things are not slowing down at all, so we shall see.
Will the U.S. Federal Reserve cut rates?
The U.S. Federal Reserve (the Fed) story is getting less exciting.
The latest message from Fed officials is that rates are likely to remain on hold for a while. Cleveland Fed President Beth Hammack said policy may need to stay unchanged “for quite some time,” reflecting persistent uncertainty and inflation still above target.
Markets have adjusted. The aggressive easing story is fading, but equities are not falling apart. If earnings are strong enough and the labour market remains stable, the market can live with a Fed that is patient rather than friendly.
The risk, of course, is that inflation stays sticky while energy prices remain elevated. But for now, the market seems more focused on earnings power than on the absence of rate cuts.
What can we expect from retail sales?
Next week, retail sales will matter as investors look for signs that the consumer is still absorbing higher energy prices. For now, earnings are carrying the tape, however.
Listen to the latest podcast from the IG Investment Strategy Team for further insights.
