While geopolitical risks remain, global equities are refocusing on fundamentals, with earnings momentum, led by tech, underpinning market resilience, says Wolf von Rotberg of J. Safra Sarasin Sustainable Asset Management.
While the war in the Middle East continues to linger, tensions have likely peaked, and a resolution of sorts appears more likely than a renewed flare-up of the conflict. A gradual increase in the amount of oil flowing through the Strait of Hormuz should accompany such a development, leaving oil prices exposed to downside risks. In our base case, we assume Brent oil to drop to USD 80/bbl, roughly 20% below current levels.
Equity markets have moved on from the conflict
Global equities have seemingly already left the conflict behind, as they have recovered their pre-war levels earlier this week. A small ‘peace premium’ may still be had in case a deal between the US and Iran is reached. The global equity market PE may re-rate by another 2%, after rising by more than 8% over the past two weeks. If oil prices were to fall even further, which would likely only happen in case of a full re-opening of the strait, global equities may re-rate by 4%. However, this would likely be as good as it gets. Further upside for equities needs to come from other sources, namely earnings.
Earnings upgrades have accelerated
Earnings are looking healthy going into the Q1 reporting season. Driven by tech and in particular semiconductors, consensus upgrades have taken hold across regions. Consensus earnings in Emerging Markets and the US naturally benefit the most from those dynamics, given the outsized exposure to tech. In the US, the tech sector singlehandedly accounts for all the earnings upgrades over the past six months. US consensus index earnings would have been flat without tech but have risen by 5% instead since October.
Strong results for tech names in Asia and Europe
This raises the question of whether these earnings expectations are realistic and achievable, or whether excessive optimism has taken hold. A look at early Q1 reporting provides little reason to worry. Asian semiconductor and memory chip names have broadly beaten consensus expectations.
After strong Samsung results last week, TSMC beat expectations and raised its guidance for 2026, reiterating that it is still seeing strongly growing AI-related demand for its product. The sector has also been largely unaffected by the war in Iran, with helium supply shortages being one potential bottleneck. Yet disruptions to Qatar supplies have been buffered by substantial inventories in Korea and increasing imports of US helium into Taiwan.
ASML in Europe has also lifted its full-year forecast this week, while citing capacity constraints to meet demand as a limitation in the current quarter. This has briefly weighed on the stock but underlines the continued strength of demand in the AI supply chain. We are thus confident that recent consensus upgrades to semiconductor earnings are more than a fad. The AI build-out has room to run and should be reflected in earnings across the supply chain over the coming months.
In the US, banks have dominated
In the US itself, Q1 reporting has so far been dominated by the financial sector, with most major banks releasing results over the past week. Apart from a few hiccups, banking sector earnings remain strong. Trading income has once again been a key driver of profit growth in Q1, following strong results in 2025.
Market volatility around the Iran conflict has lifted equity trading revenues in particular, without much of a negative impact due to the war, as visible in results. With 7% of companies in the S&P 500 having reported Q1 figures, year-over-year EPS growth for the S&P 500 is tracking at 16.3%, well ahead of recent quarters. We remain fairly confident that reported numbers will remain reasonably solid in the weeks ahead and would expect companies to beat expectations at or above historical averages of around 70%.
Limited but positive exposure to equities seems appropriate
Yet there are reasons to dial back equity exposure somewhat. First, markets have risen back to record highs and valuations have only limited room to move higher. Second, risks are skewed to the downside if tensions in the Middle East were to heat up again. Third, earnings revisions outside the tech sector are looking less compelling than those for tech. And lastly, some macro data have started to roll over. Global PMI momentum has turned negative recently, increasing near-term cyclical headwinds.
