Well, That Didn’t Last Long! - Global market update

On June 16th 1978, cinema goers were treated to the second instalment of a thriller franchise that did very little to help the work of the tourist agencies on the east coast of the US. “Jaws 2” was released to mixed reviews, and while the performances of Roy Scheider, Lorraine Gary and Murray Hamilton, the special effects and John Williams' musical score were praised, it received criticism for essentially duplicating the formula of the first film. However, in retrospect, the film is generally regarded as the best of the three Jaws sequels. But more pertinent to last week in markets was the legendary tagline from the movie – "Just when you thought it was safe to go back in the water..." – investors who thought the machinations of the US/Iran conflict were over received a wake-up call as the missiles took to the air.

As before, what likely happens from here will be commodity and stock prices taking their lead from the daily over and back of headlines around attacks and negotiations until something more concrete comes along to dictate matters – luckily for us, on the near-term horizon, there is one such event – US and European earnings season kicks off this week.

Heading into this US reporting season, analysts and companies have been more optimistic than normal in their earnings outlooks for the second quarter. As a result, estimated earnings for the S&P 500 for the second quarter are higher today compared to expectations at the start of the quarter. Putting numbers on this, we see that over the three months to end-June, analysts raised their forecasts by 3.4%, which is in marked contrast to the typical quarter where the number crunchers usually start high and then lower numbers as the quarter progresses. 

Are they doing this off their own bat? Not really, as both the number and percentage of S&P 500 companies raising their market guidance for Q2 2026 are higher than average as well. At this point in time, 111 companies out of the 500 have issued updated guidance, with 63 of these increasing numbers. However, it should be noted that most of the increase in earnings expectations for Q2 over the past few months has been concentrated in the Energy (higher oil prices mean more money!) and Information Technology (AI is a wonderful thing) sectors.

But what is more important is the fact that, in aggregate, companies are expected to report profit growth above 20% for the second straight quarter, with the actual number currently forecast to be 23.3% growth year-on-year. Furthermore, this growth is from nearly every sector of the market – Health Care is the only sector predicted to report a year-over-year decline in earnings.

As is traditional for earnings season, the banks will be the first major sector out of the blocks to report numbers. Core trends should be positive, reflecting rising profits from lending due to strong loan growth and seasonal trends, alongside solid fee and expense growth and healthy capital returns. Forward-looking commentary will remain key as rates settle into a higher-for-longer path, and we should see company guidance maintained or slightly raised during the quarter. Global investment banking revenue is trending up ~20% year-on-year, driven by strong equity capital market divisions, no doubt helped by IPO activity – thank you Mr. Musk! That said, trading is mixed, with equity volumes down and primary-dealer fixed income up. As is always the case, the devil will be in the detail.

Over in Europe, over half of companies will have reported by the end of July and although things are good, they will still trail the growth rates seen in the US. Analysts expect earnings growth of 11% year-on-year in Q2 for the aggregate index, up from 9% in Q1, which, if realised, would be the strongest pace since Q4’22. Again, not surprisingly and just like the US, earnings growth expectations are primarily driven by the energy sector given the oil spike in Q2. 

Despite robust headline growth, the ability of companies to beat expectations is likely to be subdued as recent deeply negative Euro area economic surprises will form a drag. Cyclicals’ earnings recovery continues as they are expected to grow by 8% year-on-year, turning meaningfully positive after four quarters of weakness despite a continued drag from consumer discretionary, while financials’ growth is set to slow.

On both sides of the Atlantic, expectations are running high, so the potential for disappointment is elevated. With much of the growth focused on a small handful of companies and sectors – particularly in the technology space – any suggestion that growing AI monetisation doubts lead to a fade in AI capex momentum could see the picture and sentiment change rapidly.

Come on into the water but beware of what lies beneath!!