Equity: Earnings optimism elevated, macro tailwinds for EM, small caps
Our US EPS leading indicator ticked down this month to 7.5% annualized growth. This is below consensus forecasts of 11.7% for 1Q26 and 13.8% for calendar year 2026 (see Factset Earnings Insight, link), suggesting earnings expectations are now too optimistic.
Earnings estimate revisions remain positive, but the momentum is also peaking.
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With our Macro Risk Indicator still suggesting to overweight equities, we think it is more prudent to prioritize equity exposure in select US sectors and EM equities that have a higher margin of safety.
Within US sectors, our Asset Allocation Engine prefers energy, technology and consumer staples. We also note that macro tailwinds suggest an improved outlook for small caps with a fruitful period coming up for active stock selection within small caps (see our recent Note).
Outside of the US, the liquidity backdrop still favors EM over DM equities, with Brazil our top pick.
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