We wrote in our recent piece, “Will Earnings Sustain Equities Momentum?”, just how important a strong second-quarter earnings season is to the equity market rally.
So far, results have not disappointed; as of August 7, of the 415 S&P 500 Index companies reporting, 88% beat earnings per share (EPS) estimates with blended earnings up about 25% after stripping out one-time items—chiefly the Alphabet, Amazon and Microsoft equity-securities gains.
That strength has not been confined to a handful of mega-cap names; the median S&P 500 constituent also posted some of its healthiest earnings growth in years—and margins are expanding, too. The S&P earnings before interest and taxes margin hit about 19.8%, up 231 basis points year-over-year, with second-quarter aggregate operating income tracking near $1.0 trillion.1
This performance has, in turn, helped propel the S&P 500 back to a record high last week.
Beyond America’s Borders
While clearly powerful, the U.S. earnings story is, however, not the only earnings story playing out. This is partly why we are overweight global equities—as highlighted in our recent 3Q Asset Allocation Outlook and Equity Market Outlook—led outside of the U.S. by Japan and emerging markets.
Indeed, based on 66% of Tokyo Stock Exchange Prime Market Composite Index companies reporting results (as of August 7), the signs are good: 71% of companies have beaten EPS estimates, with overall earnings/net profit growth at 64% year-over-year. Japan’s manufacturing exposure, semiconductor and AI supply-chain participation, governance reform, and policy tailwinds tied to defense and shipbuilding, have all helped drive earnings.
It’s a similar growth story in emerging markets—more cyclical and more geared to global industrial production—where MSCI Emerging Markets Index companies are tracking estimated 2026 EPS growth rates of 59% (as of August 7), supported by AI-linked strength in China, Korea and Taiwan, manufacturing exposure and the benefit of a weaker dollar.
Underlying this is a broader signal worth watching: improving manufacturing data points to a capital-intensive economic reacceleration, one that tends to favor markets with a more industrial tilt. The U.S., by contrast, carries far less of that industrial weight from a capital markets perspective, which is one reason this reacceleration shows up more visibly in Asia’s earnings than in the U.S.
Can Europe Surprise to the Upside?
While this broader earnings momentum was largely anticipated, what has been a surprise is Europe—where we have an underweight—which is having its strongest earnings season in years.
With 78% of Stoxx 600 Index companies reporting second-quarter earnings (as of August 7), 63% have beaten EPS estimates—surprising positively by five percentage points—with EPS growth at 23% year-over-year.
The upgrades have been led by banks and semiconductors, alongside strength in aerospace, diversified financials and transportation—some evidence of a genuine, broadening earnings recovery rather than a single-sector fluke. That said, the composition still gives us some pause. A meaningful share of Europe’s 2026 earnings growth remains concentrated in autos and banks, and we believe much depends on whether the European Central Bank can navigate monetary policy without tightening into economic weakness.
The ECB’s history of hiking too early or too late (in 2008, 2011 and 2022), means much is riding on it making the right decision. Recent commentary from ECB President Christine Lagarde has been mixed, with a hawkish tilt since the re-escalation of the Middle East conflict. In our view, avoiding a misstep, paired with a cap on oil and natural gas prices given Europe’s outsized energy sensitivity, could be genuinely constructive for earnings—not merely as a matter of borrowing costs, but as a boost to sentiment in its own right.
What’s more, valuations offer a further cushion: European equities trade at roughly 14.8x forward earnings against 20.0x for the U.S., a discount that looks increasingly hard to ignore if earnings momentum continues to build.
Global Momentum, Selective Diversification
To be clear, Europe has a number of challenges—weak growth, earnings sensitivity to cyclicals, policy complexity, energy vulnerability—that make it difficult to justify an upgrade in the near term, but earnings are at least showing signs of some strength returning, which is promising.
More broadly, while we remain overweight U.S. equities for compelling reasons, this earnings season is a reminder that concentration risk cuts both ways. The same resilience and earnings growth we have been seeing in the U.S. is increasingly showing up elsewhere, and that broadening is itself a diversification opportunity, not just a data point.
As mega-cap concentration risk builds at home, we believe a modest allocation toward markets where earnings are just beginning to broaden—Japan, select emerging markets and potentially Europe—offers investors a genuine complement to a U.S.-anchored portfolio, spreading earnings exposure across a wider set of drivers rather than leaning ever more heavily on the same handful of names.
What to Watch For
Tuesday 08/11
- Australia RBA Interest Rate Decision
- U.S. ADP Employment Change
- U.S. Existing Home Sales
Wednesday 08/12
- Germany Consumer Price Index
- U.S. Consumer Price Index
- U.S. 10-Year Note Auction
Thursday 08/13
- U.S. Initial Jobless Claims
- U.S. Producer Price Index
- U.K. GDP
Friday 08/14
- U.S. Core Retail Sales
- Eurozone GDP