What to watch in the week ahead

• S&P 500 companies are on track to deliver their strongest earnings growth in years, with gains becoming increasingly broad-based across sectors. Investors will look for guidance that profit momentum can continue through the second half of the year. We remain constructive on equities while emphasizing diversification.
• Economic conditions in Europe appear to be improving after a prolonged period of weakness, while the outlook for India has also strengthened. This week’s ECB meeting and key survey data will help investors assess whether the recovery is becoming more firmly established. We favor Eurozone equities and European banks, have upgraded India, and have downgraded the Swiss market to Neutral.
• Inflation data have moderated recently, although renewed geopolitical tensions and higher oil prices are likely to keep price pressures in focus. Investors will seek further evidence that central banks can keep policy rates on hold. We believe current bond yields offer attractive opportunities to lock in income, with high yield and emerging market credit complementing quality bonds in a diversified allocation.

Will corporate earnings support a continued US rally?

The S&P 500 fell 1% on Friday and 1.6% for the week overall, amid renewed worries over the outlook for AI capital spending. Even after this decline, however, the index is still up 9% so far this year and stood just 2% from its all-time high at the end of the week. Earnings growth has remained the principal foundation of the US equity rally. First-quarter S&P 500 earnings grew by around 20% year over year on an underlying basis, the strongest pace in four years, and we expect growth to accelerate to roughly 28% in the second quarter. More strikingly, all 11 sectors of the index are expected to report higher profits, suggesting earnings growth is extending well beyond a handful of large technology companies.

The coming week should provide one of the clearest tests yet of that earnings story. A broad range of companies will report results, allowing investors to assess whether improving profits are spreading across more sectors of the economy. Management guidance will be closely watched for evidence that demand remains resilient despite geopolitical uncertainty and concerns about growth. Business activity surveys from the US, Europe, and Japan will provide a useful cross-check on business conditions.

Our view on stocks remains constructive. AI-related investment continues to provide a powerful engine for growth, with spending expected to rise strongly this year. But the more important development is that earnings growth is becoming increasingly broad-based. We expect the median S&P 500 company to deliver profit growth of around 12% in the second quarter, while improving conditions in financials, industrials, health care, and consumer sectors are reducing dependence on a narrow group of market leaders. We continue to favor diversified equity exposure as earnings leadership broadens.

Will profit growth contribute to a further geographical broadening of equity gains?

One of the most important market developments this year has been the gradual improvement in prospects beyond the US. Manufacturing activity in the Eurozone appears to have bottomed, cost pressures are easing, and earnings expectations are beginning to recover after years of stagnation. Eurozone inflation slowed to 2.8% in June from 3.2% in May, while we expect earnings growth to strengthen to 8% this year and 15% in 2027.

This week’s European Central Bank rate decision, Eurozone consumer confidence data, and business activity releases will provide further evidence on whether the region’s recovery is gaining traction. While these releases will influence sentiment toward Europe more broadly, the key question for investors is whether improving growth conditions can support a wider range of equity opportunities beyond the US market.

We believe the conditions are increasingly in place for a broader advance in global equities. We have upgraded Eurozone equities to Attractive as earnings prospects improve and cyclical conditions recover. We also favor European banks, supported by stronger loan growth, healthy capital markets activity, and a more supportive operating environment. In Asia, we have upgraded the Indian equity market to Attractive as growth and earnings recover. By contrast, we have moved Switzerland to Neutral following strong recent performance and our preference for markets with greater cyclical potential. Structural investment linked to artificial intelligence, electrification, and defense should provide additional support for global earnings over the coming years.

What does moderating inflation mean for central bank policy?

Inflation has moderated recently, providing a more supportive backdrop for markets. US core consumer price inflation slowed to 2.6% in June, goods prices fell, and underlying services inflation remained modest. The data helped ease concerns that the recent energy price shock could translate into broad inflation pressures throughout the economy. However, fresh attacks in the Middle East and renewed disruption around the Strait of Hormuz have highlighted the continuing risk of another energy-driven inflation increase.

Attention now turns to policymakers. The ECB's interest rate decision will be the week’s main central bank event, while Eurozone and UK data will provide further evidence on the balance between growth and inflation. In the US, the Federal Reserve enters its blackout period ahead of its 28-29 July meeting, leaving markets to focus primarily on earnings and incoming economic data. The key issue is whether recent disinflation proves durable enough to reduce concerns about additional policy tightening, even if energy prices remain volatile.

We continue to believe that markets are pricing a more restrictive policy path than is ultimately likely to materialize. While policymakers remain cautious, moderating inflation and slower growth should reduce the need for aggressive tightening. As a result, we expect bond yields to decline over time, reinforcing the case for fixed income. Elevated yields continue to offer opportunities to lock in income, particularly in quality short- and medium-maturity bonds. High yield and emerging market credit can play a complementary role in enhancing portfolio income and total return potential, while broad commodity exposure can help manage the risk of renewed energy supply disruption.