The stock markets are still advancing. Helen Jewell gives three reasons why it's worth investing in stocks.
The Middle East conflict has forced oil prices to rise above $100 per barrel, inflamed inflation, slowed growth, and pushed central banks toward tightening. The equity markets have hit records in the past few days but have continued to do so for many months. Three main reasons are at play. First, earnings growth. Earnings are the driving force behind markets in the long-term, and have a significant impact on the present. Goldman Sachs estimates that global earnings will grow by?20%?by 2026. Earnings-per-share expectations have also been revised upwards by 6% following the U.S. and Israeli attacks on Iran. Goldman Sachs says that energy earnings are largely responsible for this growth, which has been revised up by 57% as oil prices have soared. Many other sectors also saw their earnings expectations rise since the end February. The technology sector, which had already been forecasting a bumper year of growth, has seen its earnings expectations revised upwards by 2%. This rosy outlook is largely due to the massive corporate investment in artificial intelligence. The trend has outweighed investor fears of conflict-related earnings drag. AI capex will total $800 billion by 2026. BlackRock Fundamental Equities' analysis estimates that the total amount could reach $8 trillion by 2030.
This unprecedented spending drive?could be a source of long-term earnings support, particularly for companies in America and Asia who provide memory and power that are much needed.
AI is also a high energy user. The current energy crisis, coupled with this technological revolution, is likely to accelerate the energy evolution. Governments are increasingly focusing on energy independence as well as an "all-of-the above" strategy that includes both fossil fuels AND renewables. Stock pickers can find significant earnings growth in energy infrastructure, clean power generation, transmission of electricity and energy efficiency.
VALUATIONS IN PERSPECTIVE
The second reason is valuations, which are directly related to earnings. The indices may be at all-time highs but the valuations aren't. The earnings growth has been so robust in certain areas of the market that 'price to earnings levels look less extreme now than they did?a few month ago. Goldman Sachs reports that the S&P 500 P/E ratio has fallen to 21.5, from the pre-conflict levels of 25. This is largely due to the fact that earnings growth expectations are up 6% since conflict began. It's the same for global stocks.
According to LSEG, the P/E for technology stocks has dropped from 36 in 2025 to around 25 today. These levels again reflect the strength in earnings (the "E"), which has increased while the price (the "P") has not kept up. This is an indication that the fears of market complacency are overdone. Overall market levels may rise if there is a lasting solution to the Middle East conflict and the Strait of Hormuz is reopened. The leadership will extend beyond AI-related winners. We now come to our third reason, which is flows. Global investors have been able to maintain a risk-on attitude due to robust earnings and reasonable valuations. BlackRock data show that global exchange-traded product flows in April totaled $213 billion - the sixth highest month ever for inflows. Around $150 billion of this money went to equity products. Flows into commodity funds also showed positive results. This trend is not likely to change, given the solid fundamentals of today’s market leaders.
CLOUD ON THE HORIZON
Yet risks remain. Oil prices could remain high through 2026, leading to shortages of refined goods, higher inflation, and lower growth. The equity valuations reflect this uncertainty. This helps to explain why the prices haven't kept pace with earnings. We do not think that markets have priced this risk in, especially given the current supply shock's size and the increasing pressure on the bond market.
Second, large AI spenders, such as U.S. technology companies, may reduce their investment plans, possibly due to pressure from shareholders or a weakening of the consumer market, as new semiconductor capacity is brought online. This would disrupt the current supply-demand imbalance, which favors chipmakers as well as many other companies in the AI supply chain.
Short answer: questions about complacency in the face of geopolitical, macroeconomic and other?uncertainty is legitimate. The current market doesn't seem frothy if you look at the metrics that matter most - earnings, valuations and flow. It appears to be a 'rational' market.
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(source: Reuters)
