Expect fundamentals to be back in the driver's seat in 2026, says Emily Roland

Earnings Season Outlook & Investment Strategy – Emily Roland, Manulife John Hancock Investments

Key Concepts:

• Earnings Growth: Projected increase in corporate profits.
• Multiple Expansion/Contraction: Changes in the price-to-earnings (P/E) ratio of stocks, reflecting investor sentiment.
• Fiduciary Responsibility: The legal obligation to act in the best interests of a client.
• CapEx (Capital Expenditure): Funds used by a company to acquire, upgrade, and maintain physical assets.
• Bond Vigilantes: Investors who sell bonds in response to perceived inflationary pressures, driving up yields.
• CPI (Consumer Price Index): A measure of the average change over time in the prices paid by urban consumers for a basket of consumer goods and services.
• BLS (Bureau of Labor Statistics): U.S. government agency that collects and reports economic data, including CPI and shelter costs.
• Shelter Costs: Component of CPI reflecting housing expenses.

I. Earnings Season Kick-Off & Overall Market State (2026 Outlook)

The earnings season is beginning with reports from JP Morgan, Delta Air Lines, BNY Mellon, Bank of America, Wells Fargo, and Citigroup. Emily Roland of Manulife John Hancock Investments anticipates a strong earnings engine in the U.S., forecasting 8% earnings growth for the current quarter. This expectation is supported by several tailwinds: declining interest rates, benefits from the “One Big Beautiful Bill” (likely referring to infrastructure legislation), a weaker dollar (benefiting the 40% of U.S. company revenue derived overseas), and falling oil prices reducing transportation costs. While significant multiple expansion isn’t expected (current forward earnings are at 22x), the U.S. is considered to have the most robust earnings engine globally.

II. Multiple Contraction & Investment Approach

Roland acknowledges the possibility of some multiple contraction, despite a 14% earnings growth estimate which, at current multiples, would suggest a higher market advance than the projected 6-8%. She attributes recent market gains to multiple expansion driven by technical factors (momentum and chart following) rather than fundamental analysis. She predicts a shift back towards fundamentals in 2026, emphasizing the need for a selective, “quality at a reasonable price” investment strategy. Active management is deemed crucial in this evolving market environment.

III. Sector Preferences & Diversification Strategies

If the market becomes “stock pickers market”, Roland highlights several preferred sectors:

• Technology: Remains favored due to its strong historical returns (28% projected earnings growth this year, following 25% last year, and representing 34% of the index). However, diversification away from tech is recommended.
• Industrials: Identified as the most attractive cyclical sector, benefiting from capital expenditure (CapEx) initiatives spurred by infrastructure legislation. Opportunities exist in mid-cap industrials.
• Healthcare: Value is being found in this sector.
• Utilities: Included as an AI play.

Roland advocates for broadening market exposure beyond large-cap stocks, suggesting opportunities in mid-caps (trading at a 30% discount to large-caps) while cautioning against the lower quality often found in small-caps. International exposure is also recommended, leveraging currency diversification as the dollar loses its “risk-off” appeal, with the Euro becoming a destination for capital. Non-U.S. equities experienced a strong year in the past, despite lacking the earnings prospects of U.S. companies.

IV. Bond Market Concerns & Inflation Outlook

While acknowledging rising deficits (potentially reaching $40 trillion), Roland believes the bond market is overly nervous. She notes the emergence of “bond vigilantes” towards the end of the previous year. However, she sees value in bonds at current levels, arguing that they are not fully reflecting the disinflationary trends.

She points to a discrepancy between official CPI shelter cost figures (3.5-4%) and real-time housing measures (close to flat), suggesting that inflation is not a significant concern for the Federal Reserve. The primary focus for the Fed is the labor market. If inflation declines and the bond market recognizes this, yields could fall, and money market yields could decrease.

V. Notable Quotes

• “The earnings engine in the United States is on.” – Emily Roland, emphasizing positive corporate profit prospects.
• “You’ve almost had to sort of remove macro analysis from your brain over the past year and just follow charts.” – Emily Roland, describing the recent market driven by technicals.
• “We think that fundamentals are going to be back in the driver’s seat in 2026.” – Emily Roland, predicting a return to fundamental analysis in investment decisions.
• “Bonds to us are not sniffing out the disinflation that’s coming through the pipeline.” – Emily Roland, highlighting a disconnect between bond market sentiment and underlying economic data.

VI. Logical Connections & Synthesis

The discussion flows logically from an overview of the upcoming earnings season to a broader assessment of the market’s valuation and prospects. Roland connects the positive earnings outlook to specific economic factors (lower rates, tax benefits, weaker dollar, falling oil prices). She then transitions to the need for a more discerning investment approach, emphasizing fundamentals and diversification. The bond market discussion is linked to the inflation outlook, suggesting that a decline in inflation could lead to lower yields.

Main Takeaways:

• Expect solid earnings growth in the current quarter, driven by multiple tailwinds.
• Be prepared for potential multiple contraction, requiring a selective investment approach.
• Prioritize quality companies at reasonable prices, emphasizing active management.
• Diversify beyond technology and large-cap stocks, exploring opportunities in industrials, healthcare, utilities, mid-caps, and international markets.
• Monitor inflation and the labor market closely, as these will be key drivers of Federal Reserve policy and bond market performance.