Cuts are coming
Last Friday, Federal Reserve Chair Jerome Powell described a shift in the balance of employment and inflation risks, and the market rallied on the news. For us, nothing has changed. We have been closely monitoring the labor market and indicators of inflation, and we continue to expect two rate cuts this year.
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Published on 25 August 2025
Second quarter earnings season is winding down, with ~92% of S&P 500 companies having reported. Over 80% of those companies beat analysts’ expectations, pleasing many investors and correcting a downward shift in S&P 500 margin estimates that has stabilized since May.
Margins illustrate the quality and durability of corporate earnings by demonstrating how effectively a company controls costs and converts sales into profits. In 2025, net margins are expected to reach 13.3%, up from 12.9% in 2024, as well as increase another 0.7% to 14.0% in 2026. Notably, estimates for technology companies are significantly better than those of the entire S&P 500.
In fact, technology enhancements are the key driver of higher margins for the index. Specifically, the continued development and broadening adoption of artificial intelligence (AI) should bolster companies’ productivity and, in turn, lead to higher margins. Some of the ways that AI increases margins include improving operational efficiency, employing data-driven decision making, enhancing supply chain optimization, and enabling product and service innovations.
The immense progress in AI and its encouraging potential support our constructive view of equities. Improving estimates for both margins and earnings underscore our overweight position in large cap stocks and should push the market higher by year end.
794299 Exp : 25 August 2026
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Rising margin expectations continue to support equities, underscoring the resilience of corporate profitability in the face of last year’s tariffs and this year’s Middle East war. The U.S. remains especially strong compared to peers, though first quarter earnings will be an important test.
Technology valuations have meaningfully declined over the past year, but the sector continues to stand out for its strong earnings growth and relative resilience. While near-term uncertainty remains, tech still appears well positioned as a key driver of broader market growth.
Recent jobless claims data point to a resilient U.S. labor market, with both initial and continuing claims remaining low and signaling that unemployment is still contained. Although job growth has softened and remains subdued, March’s job growth of 178,000, the highest since 2024, is encouraging. Our constructive outlook still holds despite continued uncertainty related to the war in the Middle East.
Markets are reacting to the Middle East conflict with sharp moves across asset classes, signaling broad risk repricing and shifting safe‑haven behavior. While volatility is elevated, fundamentals like earnings growth continue to support our constructive outlook.
