Solid earnings despite geopolitics
Challenges increased for equity markets this week as the US-Iran conflict continued to escalate, pushing Brent crude oil higher and reigniting inflation concerns. Bond markets responded by pricing-in a higher probability of a Federal Reserve rate hike, with Treasury yields rising alongside oil. The European Central Bank held rates steady on Thursday, buying time to assess the geopolitical fallout. Investor sentiment deteriorated sharply, with interest in shorting S&P 500 index stocks approaching an all-time high.
The European earnings season gathered pace and was broadly constructive across financials and energy, with more mixed signals seen in other sectors. European banks were the standout: major lenders across Spain, France and Italy beat both profit and revenue expectations. With equities-trading revenues surging, BNP Paribas reported a 17% year-on-year increase in global markets revenue, confirming that the Wall Street trading boom extended to the continent. Nonetheless, share-price reactions were muted or negative, reflecting how much good news was already priced-in after a strong year-to-date run for the financials sector.
European energy majors also did better than analysts expected, supported by higher oil prices and strong margins. Several energy companies also increased their commitments for stock buybacks. In Asia, the week was defined by sharp rotational moves: South Korean equities staged a violent rebound of nearly 10% over two sessions, as the unwinding of leveraged positions appeared to near completion. Hong Kong outperformed on catch-up gains among Chinese internet-related companies and financials.
Technology and artificial intelligence (AI) capital expenditures were the week's defining stock-selection theme. Signals were mixed. Alphabet cloud revenue rose by 82% year-on-year and the use of its AI-tool Gemini accelerated. Nonetheless, Alphabet’s share price fell by more than 3% in after-hours trading after the company raised its 2026 capital-expenditures forecast to as much as USD 205 billion. This increase stoked fears that AI spending was outpacing near-term monetisation.
The reaction to Alphabet crystallised a key investor anxiety regarding accelerating spending on AI infrastructure. The market appears increasingly unwilling to reward such spending indiscriminately. Asian chip names rallied on Alphabet's expenditure commitment, while the broader semiconductor complex remained volatile. Investors are now more focused on the relationship between spending and returns. A clearer view should emerge as the other massive cloud computing and data storage companies issue their earnings results in the coming weeks.