- Investment Strategy Analyst
Asset classes
Hong Kong (香港), Individual
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Many market observers cautioned that the trade war precipitated by US President Donald Trump’s tariffs announcement in April would mark a profound turning point for globalization and US exceptionalism. Since the 2000s, company supply chains and consumer markets have become increasingly globally integrated and in the wake of the tariff announcements, investors braced for a sharp slowdown in international trade flows, overall economic growth, and corporate earnings. As US credibility wavered, global equities outperformed the US market in April, especially as a number of regions announced promising fiscal measures intended to boost growth.
However, such fears have not fully manifested yet. As the chart below illustrates, US company earnings are now being revised upward at the highest rate since the COVID pandemic while European earnings continue to disappoint despite optimism around fiscal stimulus.
It remains too soon to fully assess the likely longer-term investment implications of the tariffs, but investors may have been too bearish too quickly about the potential impact on company earnings, a dynamic that may now be moderating.
Investment implications
- Earnings resilience — not just valuations — is driving recent equity leadership. Investors should continue to prioritize fundamentals, monitor evolving earnings forecasts, and consider maintaining a marginally pro-risk stance in equity allocations.
- Despite strong overall European equity returns year to date, performance among major sector constituents of the index has diverged significantly. For example, while recent earnings in the financials sector have been impressive, export-reliant sectors such as autos and pharma have suffered. Allocations to higher-conviction sectors and stocks, instead of the broad index, may help to address performance dispersion and tariff risks.
- Currency moves, such as a weaker US dollar, affect multinational earnings as foreign earnings are repatriated, but a tariff-induced economic slowdown could have a greater impact on overall earnings. Assessing company operations in the context of the macro backdrop is a key element in uncovering today’s security selection opportunities.
What we are watching
- Broadening corporate earnings growth. Within the US, mega-cap tech has led a recent market rebound. While sustained earnings growth is supporting the tech sector bull run, a broadening of that growth across sectors is key to a more balanced and durable market rally.
- Inflation and growth data that better indicates the durability of current economic resilience. Economic data has been largely benign since Liberation Day, but has been mixed more recently.
- Global policy developments. US tax reform might act as a tailwind to US company earnings beyond the mega-caps and encourage market broadening. In Europe, as fiscal stimulus and structural reform play out, a resulting boost to domestic growth should support earnings.
Experts
- Product Reporting Lead
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