Earnings

GenAI momentum is building. Many companies are already reaping benefits from the technology. GenAI is disrupting entire industries, such as education, image generation, and staffing. Investors should prefer our “disruptors” basket over the “disrupted” basket.

The Q2 earnings season delivered solid earnings and sales growth and resilient margins, reassuring investors that corporate America remains in good health and is capable of navigating economic uncertainty while mitigating the impact of new trade levies. The outlook is generally positive, but with one important caveat: The full effect of tariffs has yet to materialize.

The Q2 reporting season underscores the resilience of corporate earnings, supporting our bullish outlook for equities, an outlook further bolstered by expectations of fiscal and monetary easing. However, for now, we are booking profits, closing overweights in Technology and Growth, and initiating a new overweight in Real Estate.

Banks have had a strong run and may continue to outperform, supported by a rebound in capital market activity, improving momentum in the core banking business, and the potential for rerating driven by deregulation. While risks remain, we remain cautiously optimistic.

Economic growth and rapid expansions do not always translate into higher EPS and shareholder returns. One of the key reasons is dilution. We offer a typology of dilution: (1) “offensive”, (2) “defensive”, (3) corporate governance-linked, and (4) idiosyncratic cases.

Investors should modestly underweight equities in their portfolios and look to turn more aggressively defensive once the whites of the recession’s eyes are visible. We think that will happen within the next few months.