AI fuels the strongest earnings season in years

By Howard Sparks, Senior US Equity Specialist

• Earnings growth exceeds expectations

The latest quarterly earnings season has delivered growth of around 27% year on year – the strongest quarterly expansion since the post-pandemic rebound in 2021.

• Semiconductors help drive market performance

AI infrastructure demand has driven semiconductor performance, with earnings beats, upward revisions, and strong share price reactions.

• Concentrated gains and geopolitical risks remain

Earnings strength is increasingly concentrated in AI-linked sectors, while energy-driven inflation from geopolitical tensions adds to risks.

We’re coming to the end of the latest quarterly earnings season, when listed companies report their results for the previous financial quarter (in this case, the first quarter of 2026) and update investors on their outlook. For market analysts, it’s a time to judge whether corporate profits and revenues are beating or missing expectations. 

In keeping with the forward-looking nature of financial markets, investors appear to have largely brushed aside fears of escalation in the Iran conflict. Instead, a pro-risk market mood has pushed global equities higher.

Earnings season delivers a strong start to 2026

Investors typically pay close attention to the US stock market, as it is the largest in the world by market capitalisation. In the US, earnings season has provided strong support to market optimism. Around 90% of the businesses represented in the S&P 500 have now reported, and first-quarter earnings growth is tracking close to 27% (year on year). This is more than double the 12% growth expected at the start of this reporting season, and represents the strongest quarterly growth rate since the post-pandemic equity market rebound in 2021.

The proportion of companies beating analyst expectations has also been striking. About 83% of companies have exceeded earnings expectations, pointing to one of the strongest periods of positive earnings surprises since the pandemic.

As we saw in the Q4 2025 earnings season earlier this year, investors currently have little patience for disappointment, reacting more strongly to earnings misses than earnings beats. On average, companies that missed their forecasts underperformed the S&P 500 by almost 5% the following day; for those beating expectations, average outperformance was just below 1%.

Past performance should not be taken as a guide to future performance. The value of investments, and the income from them, can fall as well as rise and you may not get back what you put in. You should continue to hold cash for your short-term needs. This article should not be taken as advice.

Investors are poised for more growth

Over the past quarter, we have seen a double-digit increase in earnings expectations for the coming 12 months.

Such a rate of revisions is historically uncommon, and has materialised amid elevated geopolitical news flow. Markets have weighed earnings against Middle East tensions, and ultimately responded more strongly to earnings. 

AI-related industries are leading the charge

Earnings reports have been strong across the S&P 500, with the majority of companies beating analyst expectations. However, the technology sector has led the way.

Within the technology sector itself, leadership has been narrow. This earnings season has capped a strong run in April (and early May) for both semiconductor manufacturers and their equipment suppliers. Demand for chips has continued, moving into supply‑constrained, specialist areas such as advanced memory. This has driven sizeable earnings beats and sharp upward revisions in earnings expectations.

Price reactions have also reflected investor sentiment on the AI theme. Members of the S&P 500 Semiconductors index have seen an average share price jump of nearly 10% the day after reporting.

Semiconductor performance has been driven by an accelerating buildout of AI infrastructure. In 2026, major hyperscalers are now forecast to enact capital expenditure (capex) of more than $600bn – around 30% more than had been expected at the start of the year.

As our CIO, Fahad Kamal, noted in his April letter to clients, “capex at these levels means more than a one-off ‘shot in the arm’ for the economy. When new data centres are built, they equate to multi‑year projects, bringing increased demand for skilled labour, materials, and broad construction activity. In this way, the economic and market impact of AI capex can broaden beyond AI-related sectors.”

Given their role in the semiconductor supply chain, emerging market (EM) equity markets have also benefited from the AI theme. Indices in technology-dominated EM countries have reached new highs: as we write, South Korea’s Kospi is up by 87% in 2026 so far. As a reminder, we increased our allocation to EM equities earlier this year, attracted by access to the AI theme at cheaper valuations.

Risks to earnings: one internal, one external

AI leadership in equity markets brings opportunities and has bolstered corporate earnings, but we’re mindful of risks too.

The first is an internal market risk: an overreliance on the AI theme. Taking EM equities as an example, leading semiconductor companies account for 62% of EM equity market performance in 2026 so far, and 58% of its earnings growth. This highlights both the strength and concentration of the current earnings cycle, and increases EM sensitivity to any slowdown in AI-related investment.

The second risk to earnings is external: the potentially inflationary effects of the US-Iran conflict on energy prices. Higher energy prices have not yet had time to appear in corporate earnings, but some regions and sectors would be more exposed than others. EM economies are often highlighted as energy-sensitive, but the EU imports around 60% of its energy and has much lower equity market exposure to technology.

This earnings season has supported our current pro-risk views

Our view on these risks is that they are currently manageable, with investors being rewarded for participation in the AI theme.

For now, the AI investment wave shows little sign of easing, keeping earnings growth high. When it comes to energy-related inflationary effects, we closely analyse inflation indicators as part of our robust Anchor & Cycle process.

Taken altogether, we see the latest earnings season as supportive of our current pro-risk view. It continues to support our overweight position in equities, especially in EM.