Markets at New Highs - But How Secure Are They?

Global stock markets have continued to climb through the summer, with corporate earnings playing a big part in sustaining momentum. As the second-quarter reporting season wraps up, it’s worth reflecting on what the numbers tell us and where risks and opportunities may lie next.

US Earnings: Strong but Uneven

American companies delivered a solid set of results. Earnings for S&P 500 firms grew around 9%, comfortably above the 10-year average, with four out of five companies beating expectations. Margins expanded and, despite tariffs beginning to bite, firms have so far managed costs well through supply chain adjustments and price increases.

But the picture is uneven. Technology and communication services companies, many benefiting from heavy AI-related investment, carried the bulk of the growth. Financials also surprised to the upside, helped by stronger capital markets activity. By contrast, more traditional sectors such as healthcare, consumer staples and industrials lagged behind.

Europe: Better Than Expected, But Fragile

In Europe, results were broadly positive, but less impressive than across the Atlantic. Banks delivered strong profits, while the recent US–EU trade deal offered some relief to exporters. However, the stronger euro hurt overseas revenues, the autos sector struggled, and a spate of profit warnings underscored policy uncertainty. Forward earnings estimates have been drifting lower across most industries.

Emerging Markets: Near-Term Slowdown, Long-Term Potential

Emerging markets were more mixed. Consensus points to subdued growth this quarter (around 2%) as Asian exporters face trade headwinds, Chinese e-commerce firms grapple with fierce competition, and Saudi earnings were hit by lower oil prices.

Yet the medium-term outlook remains attractive. Rising semiconductor demand supports Korea and Taiwan, India continues to benefit from strong domestic consumption, and corporate governance reforms in places like Korea are improving confidence. Valuations remain lower than in developed markets, and international investors still appear underweight. With interest rate cuts likely in the US, a softer dollar could also prove supportive.

Market Risks: Valuations and Tariffs in Focus

Equity markets have notched fresh highs this year, but not without growing concerns. Valuations in the US, in particular, are looking stretched. Tariffs will weigh more heavily in the second half of the year, while signs of a cooling US labour market and services sector are adding to investor caution.

At the same time, there are reasons not to be overly pessimistic. Rate cuts from the Federal Reserve should help valuations, and many of the AI-driven growth stories are proving resilient even against a slowing economic backdrop.

Are Valuations More Stretched Than They Look?

There’s been endless debate about whether the so-called “Magnificent Seven” are driving stock market valuations to unsustainable levels. Their average price-to-earnings (P/E) ratio is high at around 33, but Howard Marks, one of the industry’s most respected voices, argues this may not be the real worry.

Instead, it’s the other 493 companies in the S&P 500 that deserve attention. Their average P/E ratio sits near 22, well above the long-term mid-teens average. In other words, valuations are elevated across the market, not just concentrated in the headline-grabbing tech giants. That’s why many analysts see today’s pricing as stretched, even beyond the AI-fuelled leaders.

This distinction matters for investors. It underscores the importance of careful stock selection and, more broadly, ensuring portfolios aren’t overly reliant on a narrow set of market narratives.

What This Means for Investors

The latest earnings season is a reminder of why balance matters. Growth remains concentrated in a handful of sectors and regions, while risks such as tariffs and slowing growth loom large. But fundamentals are still supportive overall, and long-term drivers, particularly in emerging markets and technology-linked sectors, remain compelling.

For investors, the key is to avoid chasing performance in the narrow group of stocks that have led the rally, and instead ensure portfolios remain well diversified across regions, sectors, and asset classes.

If you’d like, we’d be happy to run a personalised portfolio analysis showing how your investments are positioned across regions and sectors, and how they might perform under different economic and market scenarios. It’s a useful way to ensure your strategy remains well-diversified and aligned with your long-term goals.