MWW - Stagflation Scare → Earnings Flair

 

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To open with a cliché: A lot can change in a short span of time. No kidding. As April began, markets were grappling with rising stagflation concerns and flirting with correction territory. The TSX and S&P 500 both stumbled as conflict involving Iran sparked what became the largest oil supply disruption on record. Just a few weeks later, the backdrop looks markedly different. Sorta. Equity markets have pushed to new all‑time highs, buoyed by hopes for de‑escalation in the Middle East and steady support from strong and improving corporate earnings.

That sharp reversal naturally raises an important question: Is the renewed optimism warranted, and what does it mean for markets from here?

While near‑term direction will still be influenced by geopolitical developments, we believe markets have likely established a more durable floor. The sudden transition from fear to confidence reflects a renewed focus on fundamentals, supported by several meaningful shifts beneath the surface.

1. Diminishing tail‑risk scenarios
A key driver of the recent relief rally appears to be the market’s reassessment of worst‑case outcomes. The risk of an extended, destabilizing conflict has eased as the ceasefire holds and incentives for both Iran and the U.S. increasingly favor negotiation over escalation.

2. Cooling pressure from energy and rates
Although oil prices remain elevated, they have retreated roughly 25% from their intraday peak in March. Futures markets now suggest WTI prices settling into the $70–$75 range by year‑end. This follows a familiar historical pattern in which oil prices spike immediately after geopolitical shocks and then retrace as supply fears moderate. At the same time, interest rates appear to have steadied, with the 10‑year Government of Canada bond yield holding within our expected 3.0% to 3.5% range.

3. Consumer resilience aided by fiscal support
To date, the economic fallout from the conflict has remained contained, with consumers continuing to show resilience. While higher energy costs are a headwind, recent policy measures are providing some offset. In Canada, the federal government’s decision to suspend the gasoline tax through early September should offer modest relief to households. In the U.S., larger tax refunds under the new tax framework are also helping. The average refund now sits near $3,500—about 11% higher than last year. In aggregate, household stimulus could approach $200 billion in 2026, more than offsetting an estimated $80–$100 billion increase in fuel and energy spending tied to higher oil prices.

4. Earnings momentum remains intact
As earnings season unfolds, results are reinforcing the view that the equity bull market remains well supported. Q1 reporting season, which is just picking up steam, will yield more insights into how companies are managing the latest round of shocks and opportunities. Early indications reveal that such confidence is well founded. In the U.S., for example, big banks and other financial institutions are among the first to report results. According to Bloomberg statistics, the 46% (37 of 80) of financial firms that have already reported saw aggregate earnings growth of 25%. Trading and merger and acquisition (M&A)/deal revenues have broken fresh records – many of them set just last quarter. The industry is redirecting capital (which had been sidelined in anticipation of more stringent reserve requirements) into other investment and lending activities. In addition, key bank and credit card companies discussed the continued sturdiness of consumer activity and balance sheets.

5. Positioning unwind after defensive extremes
The initial energy shock prompted many institutional investors to rotate defensively and add hedges amid elevated volatility. The subsequent unwinding of those positions has likely amplified the sharp, V‑shaped rebound and helped propel markets to fresh highs.

While sentiment can shift quickly, corporate earnings trends tend to be far more durable drivers of market performance. Investor attention will now turn to management commentary, particularly around higher energy costs, which only began to meaningfully affect results late in the quarter. In Canada, the TSX’s heavy exposure to energy is a relative advantage in this environment. In the U.S., earnings growth is being driven primarily by sectors less directly exposed to rising oil prices. Technology stands out, with first‑quarter earnings now expected to grow roughly 45%, representing the second‑largest upward revision since the conflict began. Strength in the energy sector is also helping offset cost pressures elsewhere across the index.

Looking ahead, it would be premature to declare the all‑clear. The geopolitical narrative remains fluid, and while the likelihood of the most extreme outcomes has diminished, uncertainty persists around the duration and resolution of global energy supply disruptions. Many global stock indexes remain near all-time highs, illustrating yet again investors’ propensity to skate to where the puck is going rather than getting bogged down for too long worrying about where it’s been. Earnings season is prime time for gathering specific insights to help prove (or disprove) justifications for investors’ optimism. Similar to what happened after last year’s tariff issues, we are optimistic that companies have the necessary resilience and proven muscle memory to deftly confront the most recent energy-related challenges while executing on the opportunities presented by pivots and policy changes.

 

Sources: Weekly Strategy Perspectives - Between the Lines: What to Watch for This Earnings Season

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