Is earnings growth still a positive driver?

Key Concepts

• Geopolitical Risk: Concerns surrounding international relations and political instability impacting markets.
• Earnings Growth: The rate at which a company’s profits increase over a period of time.
• Market Rotation: A shift in investment preferences from one sector or asset class to another.
• Real Assets: Tangible assets like precious metals, commodities, and real estate, often sought during times of uncertainty.
• MAG 7: Refers to the seven largest technology companies (typically Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla, and Meta).
• Federal Reserve (The Fed) Policy: Actions undertaken by the US central bank to manage the money supply and credit conditions, primarily through interest rate adjustments.
• Dot Plots: A graphical representation of Federal Reserve officials’ individual projections for future interest rates.
• State Capitalism: Economic systems where the government plays a significant role in directing investment and controlling key industries.

Precious Metals Climb Amidst Geopolitical Concerns & 2026 Market Outlook

The market is experiencing a surge in precious metal prices, with spot gold reaching a record high of $2336, up 0.8%, and silver hitting a new high of $30.08, up 7.8%. Oil prices are also increasing. This segment features Thomas Martin, Senior Portfolio Manager at Globalt Investments, discussing the investment outlook for 2026 and current market dynamics.

Market Outlook for 2026

Martin expresses cautious optimism for 2026, acknowledging market nervousness due to factors like midterm elections and high valuations. However, he anticipates overall earnings growth of around 15%, broadening across various sectors as the year progresses, with many companies experiencing earnings growth exceeding 10%. He notes the market has been “jumpy” but believes this is offset by positive earnings projections.

Sector Performance & Earnings Drivers

The primary driver of earnings growth remains the Information Technology sector, mirroring the trend from the previous year. Financials are also showing growth, despite a negative market reaction to recent earnings reports. Martin expects Materials and Industrials to contribute more significantly to earnings growth later in the year. He specifically highlights the strong performance of the IT sector in the fourth quarter.

Market Rotation & Investor Behavior

A noticeable rotation out of technology stocks is occurring, with investors moving towards sectors like staples, utilities, and healthcare. Martin attributes this to nervousness and uncertainty, rather than fundamental weaknesses in the tech sector itself. He suggests investors should be “pickier” about their tech investments, focusing on companies with more reasonable valuations. He observes that even the “MAG 7” (Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla, and Meta) are expected to demonstrate solid earnings growth despite recent underperformance. He notes a broader movement away from technology, even software, despite its growth characteristics.

Macroeconomic Concerns & Policy Uncertainty

The market rotation is linked to broader macroeconomic concerns and policy uncertainty, particularly regarding potential government intervention in industries. Examples cited include capping credit card interest rates, addressing swipe fees, and government involvement in the mortgage market through Fannie Mae and Freddie Mac. Martin describes a situation with “a lot of balls in the air on a macro basis” creating investor hesitation. He specifically mentions the American president considering actions regarding Iran and the impact of events in Venezuela on oil prices.

Investor Strategies & "Real Assets"

Investors are increasingly seeking “real assets” – rare earths, manufacturing materials, gold, and silver – as a safe haven amidst global uncertainty. Martin notes a dramatic rally in these asset classes, driven by central bank demand for gold and silver. While Globalt Investments has significant exposure to these metals, they have been strategically reducing their positions due to the rapid price increases. He states, “when those asset classes…are doing well, it speaks to the uncertainty in the world.” He emphasizes that a preference for these assets over “basic blocking and tackling companies” is not necessarily a positive sign.

Federal Reserve & Interest Rate Outlook

Martin doesn’t anticipate significant rate cuts in 2026. The Federal Reserve’s “dot plots” indicate only one cut, while markets previously anticipated several by June. He believes the US economy has proven resilient, with a weakening but not severely damaged labor market. Inflation remains a concern, though not at alarming levels. He expresses confidence in the Fed’s commitment to maintaining its independence, noting that the market is already adjusting expectations for rate cuts, with the 10-year Treasury yield declining and the odds of cuts moderating. He states the economy is doing well and there is “no real need to raise rates” but acknowledges the need to “care about inflation.”

Notable Quotes

• Thomas Martin: “We’re just seeing a little bit of nervousness here and some movement that is not necessarily related to the longer term fundamentals.”
• Thomas Martin: “When those asset classes…are doing well, it speaks to the uncertainty in the world.”
• Thomas Martin: “The economy has proven to be quite resilient.”

Synthesis/Conclusion

The interview highlights a market navigating significant geopolitical and macroeconomic uncertainties. While earnings growth is projected to be strong, investor behavior is characterized by risk aversion and a rotation towards “real assets” like precious metals. The Federal Reserve is expected to maintain a cautious approach to rate cuts, given the resilience of the US economy and persistent inflationary pressures. Investors are advised to be selective, focusing on companies with strong fundamentals and reasonable valuations, while acknowledging the potential for continued market volatility. The overall sentiment is cautiously optimistic, tempered by a recognition of the complex and evolving global landscape.