Earnings: micro strength amid macro noise

It would have been easy for investors to approach this earnings season defensively. Inflation remains elevated, geopolitics continues to drive volatility, and the consumer backdrop is more uneven than in previous years. Yet, the message from US companies has been surprisingly clear: while the macro environment is challenging, the micro is strong. 

In aggregate, earnings have exceeded expectations, revisions have moved higher, and management commentary across many sectors points to resilient demand, improving order books, and powerful structural growth driven by artificial intelligence (AI) infrastructure. 

The scale of the earnings strength has been striking. With earnings now reported for most of the S&P 500 companies, first-quarter earnings growth is tracking close to 30% year-on-year, with revenues up around 11%.[1] This represents one of the fastest earnings growth periods outside of a recessionary recovery. Around 82% of companies in the S&P 500 have had positive earning surprises, and reported earnings have been posted 16% ahead of forecasts, in aggregate.[2]

More importantly, this strength is feeding through into forward numbers: 2026 S&P 500 earnings growth is now expected to be around 22.5%, compared with roughly 16.6% at the end of March, and around 13% at the start of the year.[3] Positive revisions to earnings guidance have been seen across most sectors, with healthcare and real estate notable exceptions. 

As a result, the market’s year-to-date rise has been earnings-led rather than simply as a result of higher valuations. Despite performance of the S&P 500 being up around 11% year-to-date, the index has in fact become cheaper, on a forward-earnings basis, with the price-to-earnings (P/E) multiple falling from 22.0x to 21.1x.[4] 

Beneath the headline strength, two key messages stand out. First, the consumer story is more nuanced than simply ‘weak’ or ‘strong’. Consumer activity data cited by banks and payment networks continue to suggest resilience, while results from retailers, such as Walmart*, suggest consumers are still spending, but are becoming more selective in their purchasing decisions. Additionally, growth in the segment is being driven more by transactions than ticket size, with shoppers prioritising value, convenience and essentials, with share gains led by higher-income households. This suggests that the consumer isn’t breaking, but lower-income households remain under pressure from fuel costs, inflation and weaker confidence. 

Second, AI infrastructure is now a material driver of earnings growth. This is no longer just a story about hyperscaler capital expenditure or leading-edge chips. AI demand is broadening across memory, semiconductors, power, cooling, grid equipment, storage, and transmission. AI-driven load is shifting from potential to execution, with order books and backlogs increasingly suggesting structural rather than cyclical demand. The industry’s bottlenecks are no longer limited to chips; they are increasingly related to power availability, grid connection, cooling capacity, and the speed of delivery. This shift broadens the opportunity set beyond the obvious mega-cap beneficiaries to include companies enabling the AI buildout. 

For investors, the key message is that the macro headwinds are real, but are not overwhelming company fundamentals. At the stock level, we continue to favour businesses with resilient demand, pricing power, operational discipline, and structural growth drivers. In this environment, selection is essential: the macro may be challenging, but for the right businesses, we believe that the fundamentals have rarely looked stronger. 

* For illustrative purposes only. Reference to a particular security is on a historic basis and does not mean that the security is currently held or will be held within an L&G portfolio. The above information does not constitute a recommendation to buy or sell any security.
 
[1] Bloomberg as of 1 June 2026
[2] Bloomberg as at 4 June 2026
[3] Bloomberg as of 1 June 2026
[4] Bloomberg as of 1 June 2026