US corporate earnings momentum is reinforcing a pro-risk stance among asset managers from BlackRock to Federated Hermes, even as the backdrop of the Iran war deteriorates.
As put by BlackRock in its latest Weekly Market Commentary: “US earnings are on a roll”.
Highlighting upward revisions to S&P 500 earnings growth in 2025 extending into 2026, the asset manager noted the pattern runs counter to the typical trend of analysts progressively downgrading expectations through the year.
Led by the mega-cap tech stocks, which account for around a third of the S&P 500’s market capitalisation and some 55 per cent and 37 per cent of total expected earnings growth this quarter and year, respectively, the index last week capped off its best month since 2020.
Even beyond the ‘Magnificent 7’, which still saw some laggards including Meta, BlackRock added that the broader earnings backdrop, including in materials and energy, remains healthy.
“It’s not just about future earnings: Some 83 per cent of S&P 500 companies have beaten profit estimates by an average of 11 per cent this quarter, with two-thirds having reporting. The average company has increased earnings by 8 per cent in the past year,” the firm stated.
BlackRock attributed the success to two megaforces: AI and geopolitical fragmentation.
Both factors disproportionately benefit the US over regions like Asia and Europe, which are more exposed to energy shocks and lack comparable hyperscaler scale, though emerging market (EM) semiconductor standouts such as Taiwan and South Korea remain exceptions.
Since the war began, the S&P 500 is up 5 per cent compared with 5 per cent and 4 per cent declines in European and Japanese stocks, respectively.
The ASX 200 has also had a rough run, extending losses to a five-week low on 5 May, as the economy faces softer growth, persistent inflation pressures and limited exposure to the AI boom.
US earnings strength is also unfolding against a deteriorating backdrop in the Iran war, with Iran this week firing missiles at civilian targets in the United Arab Emirates and reportedly striking ships in the Strait of Hormuz, pushing oil prices up 5 per cent.
But despite the war, AI and geopolitical fragmentation are keeping the world’s largest asset manager pro-risk, overweight US and emerging market equities, driven largely by the AI theme. Aside from a brief move to neutral in late March due to the war, this marks a continued pro-risk stance from BlackRock.
The firm, long bullish on AI, noted that the market is quickly testing lofty hyperscaler capex announcements against earnings delivery, and in some cases, already seeing results.
Federated Hermes executive vice president and chief investment officer Stephen Auth has also maintained a bullish stance, with earnings power remaining a key driver of its outlook.
In a recent memo, Auth doubled down on the view that commonly cited bearish concerns such as private credit liquidity risks, AI disruption to software and the ongoing war are essentially “bricks in the wall of worry.” I.e., “often idiosyncratic issues that dominate the headlines but are not likely to derail US market fundamentals.”
He pointed to earnings power as evidence, arguing that valuations remain relatively fair, with even the ‘Mag 7’ having seen meaningful multiple compression since around mid-2023.
Auth added that the US macro environment, particularly the labour market, has held up better than previously expected, while arguing that the productivity-enhancing effects of the AI revolution “are upon us”.
“Taken together, the market setup outlined here almost seems too good to be true. It may well be so. Certainly given the size and speed of the recovery off the recent lows, some kind of a consolidation would be entirely normal,” Auth wrote.
That said, he noted recent gains have not been accompanied by the kind of “euphoric positioning” that typically marks late-cycle tops, with investors having de-risked during the war and yet to redeploy cash raised at the lows back into markets.
“Therefore, we expect them to deploy on pullbacks, which would be fuel for a continued move higher. We are sticking with our substantial equity overweight and our call for the broad rally to continue.”
