Why equity markets are rising despite the macro gloom​​ ​

Earnings are doing the heavy lifting

It has become a popular pastime to describe this rally as fragile. The backdrop is hardly inspiring: geopolitical tensions, oil prices grinding higher and consumer confidence firmly in the doldrums. Yet equity markets have continued to push higher. The reason is not complicated. Companies are making serious money.

Profits remain the foundation of equity valuations, and at present they are growing. Markets can absorb a significant amount of negative macroeconomic news when earnings are heading in the right direction. For now, that trajectory is firmly upward, and it matters more than the headlines.

Around 80% - 85% of S&P 500 companies have beaten expectations this season, with profit margins sitting near multi‑year highs. That outcome is not a fluke. It suggests a large portion of corporate America has successfully navigated the post‑Covid pandemic cost environment that once threatened to erode margins.

Analysts are taking note. Earnings forecasts have been revised higher across the board. When the people paid to scrutinise the numbers grow more optimistic, it is usually worth paying attention.

​The Magnificent Seven are carrying a lot of weight

There is no avoiding the concentration issue. A small group of mega‑capitalisation technology companies is generating earnings growth that dwarfs the rest of the index. Their scale and operational efficiency mean that even modest revenue growth can translate into substantial profit expansion, and that dynamic is driving a large share of the broader market move.

The artificial intelligence (AI) investment cycle sits at the centre of this story. These firms are committing enormous sums to infrastructure, data centres and computing capacity. That spending is flowing through earnings across the broader technology supply chain, creating ripple effects that extend well beyond the headline numbers.

It is important to be clear‑eyed about what this implies. A rally driven by a narrow group of companies is inherently more vulnerable than a broad‑based one. If any of the ‘Magnificent Seven’ stumbles, or if AI spending fails to deliver the returns currently being priced in, the implications for the wider market could be meaningful.

Concentration risk is real. Investors holding index funds should recognise that their exposure to these names continues to grow, whether they have actively chosen that positioning or not.

​The market is still being selective

One encouraging feature of the current environment is that investors are not indiscriminately buying everything. Companies that miss earnings expectations or signal a weaker outlook are being punished, and often quite forcefully. That selectivity matters.

It suggests the rally is being driven by underlying analysis rather than pure momentum chasing. Strong results are rewarded, disappointments are sold, and capital is allocated accordingly. For a market trading at elevated valuations, that form of price discovery is reassuring.

Price‑to‑earnings (P/E) ratios across the S&P 500 remain undeniably stretched. The bullish case rests on the argument that sustained profit growth justifies those multiples. For now, the data is cooperating. It may not always, but at present the earnings support is there.

For investors considering how to allocate capital, this is a market that rewards preparation. Owning the index is the easy option. Owning the right parts of it requires more thought.

​AI's impact is broader than just tech

It is tempting to frame the AI story purely around the companies building the technology. In reality, the investment cycle is having far broader effects. Heavy spending on data centres, power infrastructure and computing hardware is creating demand across construction, energy, semiconductors and logistics, sectors that do not always feature prominently in the AI narrative but are clearly benefiting.

This helps explain why the earnings picture looks more resilient than many expected. The AI build‑out is functioning almost like a private‑sector fiscal stimulus, generating revenue and profit well beyond Silicon Valley. The breadth of this impact is easy to underestimate.

That said, the returns on this spending remain largely unproven at scale. Investors are effectively betting that productivity gains from AI will eventually justify the capital being deployed. It is a reasonable bet, but it remains a bet, and that uncertainty is embedded in current valuations.

History shows that major technology investment cycles, and the way equity markets process them, rarely follow a smooth or linear path from infrastructure build‑out to genuine economic payoff.

​What could derail the rally?

None of this makes the rally immune to setbacks.

• Elevated energy costs remain a genuine headwind for corporate margins, particularly for businesses with limited pricing power. If crude oil prices remain high, or move higher still, the margin story becomes less comfortable.
• Consumer spending is another area worth watching. Much of this earnings season’s outperformance has come from corporate and technology‑focused businesses rather than consumer‑facing ones. If household finances come under increasing pressure, that weakness will eventually feed through to revenues, and the adjustment is unlikely to be gentle.
• The long‑term return on AI investment remains the largest unknown hanging over the market. A meaningful re‑rating, if it occurs, could be swift. The concentration issue is also unlikely to fade quickly. A market where a small group of companies accounts for a disproportionate share of earnings growth is one where individual company risk carries unusual weight.

These are not reasons to avoid the market. They are, however, good reasons to avoid complacency.