Markets continue to balance ongoing policy uncertainty against a resilient economic backdrop. Below, we discuss recent geopolitical developments and early earnings season results.

Macro Volatility

Policy unpredictability remains a defining feature of the current U.S. administration, but a consistent pattern has emerged in both trade and geopolitical policy: aggressive posturing followed by de-escalation after negative market reactions. In 2025, sweeping tariff threats provoked severe market volatility before being partially rolled back. A similar sequence seems to be unfolding in the Middle East. Renewed military exchanges have driven oil prices and bond yields considerably higher, but intermittent pauses in hostilities have revived hopes that diplomatic efforts will resume. Meanwhile, new U.S. tariff proposals have resurfaced.

One risk of this recurring “escalate, de-escalate” approach is that investors may become conditioned to expect eventual policy reversals. If investors begin to look through initial announcements, market reactions could become less pronounced, reducing pressure on the U.S. administration to change course. Nevertheless, we continue to view de-escalation in the Middle East as the most likely outcome, though the path is unlikely to be smooth. While these recurrent shocks will test the economy’s resilience, underlying fundamentals remain reasonably constructive. Recent data continues to point to global growth of around 3%, somewhat slower than last year’s pace, but still a healthy environment capable of sustaining corporate earnings growth.

Earnings Face Expectations

Earnings season is well underway in the U.S., with over half of S&P 500 companies reporting Q2 results through this week. To date, U.S. companies have comfortably exceeded expectations. If the current earnings growth rate for the index holds, it would mark a seventh consecutive quarters of double-digit expansion and a second quarter exceeding 20%. Strength has also been evident outside the U.S., with Canadian and global earnings growth tracking near the upper end of their post-pandemic ranges.

In our previous letter, we noted that elevated earnings optimism raised the likelihood that the typical “meet or exceed expectations” result may underwhelm, particularly among AI-related companies. That dynamic has been playing out so far. Demand for AI infrastructure remains strong, and recent results continue to provide evidence that spending is translating into tangible returns. But market reactions suggest investors are becoming increasingly selective, more willing to reward companies where AI investments are generating visible returns while applying much greater scrutiny to businesses where capital spending continues to outpace near-term profitability.

Broader Market Leadership

AI-related companies remain key contributors to earnings and Technology is still one of the top performing sectors in the U.S. this year. More recently, however, their market leadership has taken a backseat. Over the past two months, Health Care and Financials have led while eight of the eleven S&P 500 sectors have also advanced. Encouragingly, international developed market indices remain near recent highs despite this shift in leadership.

Performance has also broadened geographically. Even after a pullback from June’s record highs, emerging market equities remain the strongest-performing region, returning roughly 15% year to date at the time of writing. International developed markets have returned around 14%, followed by Canada at roughly 13%, while U.S. equities have gained roughly 12%. In our view, broader participation across sectors and regions provides a more balanced foundation for equity returns than one driven by a narrower group of companies.

Takeaway

We remain reasonably constructive on the outlook for equities and other risk assets. The economic expansion is intact, while earnings trends imply broadening strength across sectors and regions. At the same time, several risks capable of contributing to bouts of volatility continue to warrant attention, including commodity price swings, inflation uncertainty, shifts in AI-related sentiment, and evolving U.S. policymaking. Taken together, we remain committed to a balanced approach to portfolio management, prioritizing diversification across sectors, regions, and asset classes to prepare for a wide range of outcomes.

Should you have any questions, please feel free to reach out.