The latest blog from Sacha Chorley discusses current investment challenges, focusing on the divergence between company earnings expectations and share prices, and highlights the importance of earnings season in assessing corporate performance amidst market volatility.
A key part of my job is spending time with the managers we either invest with already or are actively considering adding to portfolios. These conversations are invaluable. Talking to some of the world’s most foremost experts in their respective fields is never a bad thing, and it would be fair to say that many of these conversations have inspired thoughts around how best to construct our own investment process.
This week, two such conversations stood out. They were both with equity managers running very different strategies, focused on different parts of the world. One is an Asia specialist. The other runs a global equity portfolio. Despite those differences, both independently highlighted the same theme: a growing divergence between company earnings expectations and share prices.
For instance, the global equity manager pointed to Arthur J. Gallagher, a US-listed insurance broker. Despite forward earnings expectations continuing to rise, the share price has fallen by more than 30% from its peak. The Asia-focused manager cited similar examples across his universe - companies where earnings forecasts have held up but share prices have weakened materially.
This isn’t an isolated phenomenon. It also echoed a recent blog post by CJ Cowan where he looked at the challenging performance of quality growth stocks in the UK, where stocks with historically quite resilient business models suffer dramatic share price falls. In each of these cases, we’re seeing different regions and different investment styles struggle with the same underlying dynamic.
Now we do know that over short periods, share prices are driven by all sorts of forces that have little to do with company fundamentals. And this is not to sound disparaging: these factors really can and do matter, particularly in the short term. Just ask any hedge fund manager who has been the wrong side of a ‘short squeeze’ (where a heavily shorted stock suddenly rallies, leading to forced buying by those shorting the stock to close out their positions).
Nevertheless, there is a substantial body of empirical work showing that, over longer horizons, equity returns are overwhelmingly explained by the growth in underlying company profits rather than changes in sentiment or multiple expansion. Valuations can move around (and I really do care when they are extreme), but sustained returns require cash flows and earnings to follow.
The current environment is a good example of how markets can become distracted. Clearly, the geopolitical situation in the Middle East is front and centre. Energy prices have increased substantially, which has raised inflation expectations and bonds have repriced accordingly.
Perhaps this time really is different? I can’t recall how many times I’ve heard people talking about the possibility of the Iranian regime ‘closing the Strait of Hormuz’: honestly, I never thought they actually would. But in any case, what really matters is whether these short-term shocks translate into lasting damage to corporate earnings power. Many don’t. Some sectors and companies are hurt, others adapt, and some even benefit. Distinguishing between temporary disruption and permanent impairment is where active judgement really matters.
This brings us neatly to earnings season, which is now underway in the US. This time round, companies reported numbers will tell us about their corporate performance through the first quarter of 2026. Knowing what the actual performance has been is a helpful ground truth – but equally there is real value in management’s forward guidance. That’s where they reveal how they see demand, margins, costs and capital allocation evolving.
In the current environment, markets are particularly focused on a few questions. How persistent do companies expect elevated energy and input costs to be? Are higher interest rates changing investment or hiring plans? Is demand holding up, or beginning to soften? These answers matter far more than whether a company beats consensus by a couple of percent in a single quarter.
Headline expectations are for US earnings growth of around 11% year-on-year. Artificial intelligence-related investment continues to be a powerful driver in parts of the market, but importantly, growth is not confined to one narrow theme. Expectations imply reasonably broad-based earnings resilience across sectors.
That breadth is important. It suggests that, while some areas are undoubtedly under pressure, the overall corporate picture remains more robust than recent market moves might imply.
As always, there will be individual reports that carry outsized market significance. For example, results from companies such as NVIDIA are closely watched (20 May), and certainly keeping track of AI demand and capital expenditure trends will be key. But companies covering all sectors will be reporting and many can give us insights into different trends that are important. Some of the companies I’m interested in this time around include:
For investors, this is a time to stay grounded. Having a longer time horizon is a big advantage we have over other investors who are judged from quarter to quarter. Markets will continue to react to headlines. Volatility will remain a feature, not a bug. But stepping back, the central question remains unchanged: are companies earning money, and can they grow those earnings over time?
Because in the end, that’s what really matters.
Sacha is a portfolio manager of the Quilter Investors Cirilium and Creation Portfolios. Prior to joining Quilter Investors in 2011, Sacha worked at Broadstone with their team of economists before moving into asset allocation and fund manager research.
Sacha is a CFA charterholder and has also completed the Chartered Alternative Investment Analyst qualification. Sacha has a degree in Maths from the University of Bath.
