The courage to follow the fundamentals
Look past the noise—focus on what drives markets. Growth and earnings remain strong, even as the backdrop supporting them shifts.
Doomscrolling investors had plenty of negative headlines to consume in the first few months of the year, feeding their anxiety and contributing to bouts of capital market volatility.
Among the more extraordinary headlines that threatened to derail the bull market: the Department of Justice’s criminal investigation into Federal Reserve (Fed) Chair Jerome Powell’s statements to Congress regarding renovations of the Fed’s headquarters, several European nations symbolically sending troops to Greenland to defend it against President Trump’s threats to take over the island for national security, and the unexpected breakout of conflict involving the US, Israel, and Iran.
Yet, the multiyear rally in risk assets has remained intact. Despite sensational headlines dominating investors’ social media feeds, markets have proven once again that fundamentals are the lifeblood of the bull market.
The economy expands, earnings continue to deliver
US real gross domestic product (GDP) increased at an annualized rate of 2% in the first quarter, according to the advanced estimate from the Bureau of Economic Analysis. This represents a notable increase from the 0.5% growth rate in the fourth quarter of 2025.1 Additionally, the latest Federal Reserve Bank of Atlanta GDPNow forecast estimates the economy will grow by 3.7% in the second quarter.2
Durable economic growth has led to spectacular earnings results. S&P 500 companies delivered 27.7% earnings growth and 11.3% revenue growth in the nearly completed first quarter earnings season. That’s the sixth consecutive quarter of double-digit earnings growth and the highest rate since the fourth quarter of 2021 when the economy was emerging from the depths of the pandemic.3
Eighty-four percent of S&P 500 companies reported a positive earnings surprise and 80% announced a positive revenue surprise for Q1; both figures are above the 5-year averages.4 Fueled by the AI CapEx boom, the Technology sector was the biggest earnings season winner, reporting 50.7% earnings growth and 29% revenue growth.5 The biggest story of earnings season is that AI fears are fading fast and fundamentals are back in focus.
But it would be a mistake to describe earnings results as concentrated. Seven of 11 economic sectors delivered double-digit earnings growth and all 11 reported revenue growth for the quarter.6
Corporate profitability has never been higher. S&P 500 companies are on track to report the highest net profit margin since FactSet began tracking the data in 2009.7 Elevated productivity measures over the past few quarters suggest companies continue to do more with less. These productivity gains may be the last best hope for Fed rate cuts later this year.
Markets are bending—not breaking
Even with that strong backdrop, markets have been repeatedly tested. Despite investors’ ongoing fears of frothiness, price-to-earnings multiples have compressed this year rather than expanded.
For the moment, markets have absorbed war in the Middle East and the subsequent oil price shock. Interest rates and core inflation measures have remained surprisingly rangebound through April—even as attention shifts to upcoming US midterm elections and the policy uncertainty they may introduce.
Lingering stimulus from the One, Big, Beautiful Bill Act and the Fed’s rate-cutting cycle have also cushioned markets from most of the potential negative impacts of the war in Iran. The massive AI CapEx spending cycle, light touch regulatory environment, and resilient consumer continue to support market performance.
The World Cup, celebrations marking the 250th anniversary of America’s signing of the Declaration of Independence, and a growing slate of some of the most anticipated IPOs in years including SpaceX, Anthropic, and OpenAI likely will boost the economy in the second half of the year.
The supportive fundamental backdrop for risk assets has outweighed headline-driven fear, allowing the bull market that began in October 2022 to continue.
The real risk isn’t in the headlines
But investors may be overlooking a slow-moving but seismic shift in the landscape that has shaped the global economy and capital markets for more than four decades.
Globalization has left a lasting imprint on the economy and investing environment. The fall of the Berlin Wall, dissolution of the Soviet Union, signing of the North America Free Trade Agreement, and China’s admittance to the World Trade Organization are just some of the notable events from the globalization era.
Expanding free trade, multinational supply chains, offshoring, and rising corporate efficiency defined globalization. The US largely served as the primary provider of global security, and a peacetime dividend among the world’s nuclear-armed superpowers ensued. Globalization proponents believed that economic integration would promote global stability and growth.
For investors, globalization resulted in falling interest rates, benign inflation, higher corporate profit margins, and the rise of globally integrated industries and technology platforms. Investments in the traditional 60/40 portfolio, US stocks, growth companies, long-term fixed income, and credit delivered above-average returns during this period.8
But like most things, there were pros and cons. After decades of globalization, negative long-term consequences began to surface, contributing to a shift from globalization toward a more fragmented and regionally focused global economy.
The annexation of Crimea, Brexit, Trump’s first presidential victory, the US-China trade war, the global pandemic, the Russia-Ukraine war, Trump 2.0, Liberation Day, debate over the Fed’s independence, escalating conflict in the Middle East, and fractures within energy alliances such as OPEC are all symptoms of today’s reconfigured global environment being driven by a new set of priorities focused on economic security, resilience, and geopolitical alignment.
National security and AI supremacy are key goals for every country in the new regime.
Portfolio positioning: From efficiency to resilience
The bull market may endure, but without meaningful changes to investment portfolios, investors may be unprepared for what comes next. Investments that worked well in the globalization era may not work as well in today’s environment.
Investors should prepare for potentially higher interest rates, sticky inflation, and lower corporate profit margins.
In equities, investors may consider broadening exposure beyond large-cap growth to US small caps, emerging market stocks, defense companies, and businesses at the forefront of the AI CapEx infrastructure buildout.
In fixed income, while higher yields have improved income potential, real returns may remain under pressure in an inflationary environment. A more active approach may help balance interest rate and credit risks.
Persistent inflation and elevated rates also may reinforce the role of multi-asset strategies that diversify differently and real assets like commodities, natural resources, infrastructure, real estate, and precious metals, including gold.
The foundation for the multiyear bull market remains intact. If the economy and earnings continue to grow, stocks may continue to outpace inflation over time. But the evolving shift from the efficiency of globalization to the resilience of deglobalization requires thoughtful adjustments to diversified investment portfolios:
