Equity Outlook: Earnings Step Back into the Market Spotlight

Too many companies with solid earnings growth haven’t been rewarded in narrow equity markets. That may be about to change.

Global equities advanced briskly in the first quarter as investors reconciled themselves to a new reality of interest rates staying higher for longer than expected. With macroeconomic concerns beginning to recede, we think earnings growth is poised to take center stage as a driver of stock returns for a wider group of companies across equity markets.

When the year began, many investors believed that a series of interest-rate cuts from major central banks was imminent. While the range of potential macro outcomes was wide, the consensus anticipated a rapid succession of rate cuts early in the year to signal that the battle against inflation had been won.

That didn’t happen, and yet the MSCI All Country World Index (ACWI) climbed by 8.1% in US-dollar terms in the first quarter. Strong gains in Japanese stocks weren’t undermined after the Bank of Japan raised interest rates for the first time in 17 years in late March. Investors in US equities shrugged off the Federal Reserve’s deferral and reduction of rate cuts; markets had started the year anticipating six cuts starting as early as March. In Europe, the rate-cutting cycle is also expected to begin midyear. Investors seem to have accepted that relatively high interest rates in fact reflect a stronger economy and have recalibrated expectations accordingly.

US and Japanese Stocks Led Regional Gains