Insight & Outlook: Fidelity Market Signals Weekly

What we’re watching

Geopolitical risks continue to ebb and flow, with the Iran conflict driving sharp swings across markets—particularly in energy prices.

But, if you zoom out of headline-driven volatility, markets appear willing to look past the choppy U.S.–Iran news flow—at least for now. Attention has shifted to earnings, with renewed interest in technology and AI-related names helping support sentiment.

What the earnings numbers reveal

• Earnings expectations were already improving heading into the quarter, with consensus tracking solid first quarter year-over-year and annual earnings per share (EPS) growth. S&P 500 companies’ earnings are projected to grow by 13.2% in the first-quarter and 18% overall in 2026.¹ The estimated earnings growth rate for the large tech stocks known as the Magnificent 7 is 24.6% this year and 15.9% for the remaining 493 companies in the S&P 500, according to FactSet data.²
  
  Among all 11 sectors of the S&P 500, energy and information technology are estimated to see the highest (year-over-year) earnings growth rate (above 40%) in 2026 (Exhibit 1). With a weighting of about 33%,³ info tech is the largest sector in the index: It is expected to account for over 70% of the earnings growth this year. The sector, especially software companies, had faced headwinds since the fall of 2025 as the rapid pace of AI development sparked questions around the sustainability of software business models. That uncertainty compressed valuations.

• Q1 results point to strong start to earnings season. As of April 17, about 10% of S&P 500 companies reported results, with 88% beating mean EPS estimates. That is well above the 5- and 10-year averages of 78% and 76%, respectively, according to FactSet data.
• Management tone remains broadly constructive. During Q1 earnings calls, companies are highlighting resilient consumer demand and steady business investment despite uncertainty. Management guidance of future earnings has softened modestly at the margins but remains intact, pointing to increased caution rather than a sharp pullback - more like a normal mid-cycle slowdown than a recession warning.
  
  Despite recent supply-side disruptions in commodities, corporate earnings have remained resilient. Firms appear better positioned than in prior cycles, having diversified supply chains and inventory strategies since the Covid-19 pandemic. Higher energy prices have primarily affected consumer confidence and sectors with direct cost exposure, such as transportation. The impact on AI-related capital investment has been limited.

What has been driving the strength in earnings?

• Cost controls: Many companies are still protecting operating margins by keeping a tight grip on costs, rather than counting on faster revenue growth. That shows up in steadier hiring, tighter discretionary spending, and continued efforts to streamline procurement and supply chains.
• Ability to pass on higher prices to consumers: Pricing power has not gone away—it has just become more selective. Demand in certain sectors has helped keep revenues steady and allowed companies to pass on higher costs to consumers. In segments where customers are more price-sensitive, firms are increasingly using promotions and value offerings.
• Productivity gains: An increasing share of margin resilience is coming from efficiency gains that extend beyond a single quarter. Along with improvements like automation and process redesign, companies are seeing early benefits from tech-enabled productivity—particularly workflow automation and AI adoption. These investments are helping offset pockets of cost pressure and support more durable earnings, even as pricing power becomes harder to sustain.

Why earnings matter for portfolios

• Since October 2025, valuations for the S&P 500 based on its next-12-month price-to-earnings (P/E) ratio have fallen, first reflecting concerns that AI could disrupt software firms and subsequently driven by rising geopolitical risks. That ratio declined from a peak of 23.1 on October 29, 2025, to 19.1 on March 30, 2026.⁴ Earnings estimates, however, rose 11% during the same period. Corporate earnings are increasingly acting as a counterweight to macro-driven volatility. While earnings will not eliminate market swings, they are helping keep volatility in check rather than allowing them to dominate returns.
• With results so far broadly validating expectations and reinforcing underlying fundamentals, the risk of an earnings-led drawdown appears limited in the near term, in our view. Markets may continue to react to policy shifts, interest-rate moves, or renewed geopolitical tensions. We believe the amplitude of these swings should diminish over time as earnings strength and underlying fundamentals reassert themselves.
• Q1 earnings are reinforcing the “rationally optimistic, resilient growth outlook” narrative. The results so far have been strong enough to sustain equity markets, but with increasing stock-to-stock differentiation over the long term.
• In our view, this earnings backdrop argues for staying invested through periods of volatility, maintaining diversification as market leadership broadens, and emphasizing active stock selection. Investors may want to focus on companies that can deliver steady earnings, protect margins, and maintain strong balance sheets.