The earnings test

Equities can withstand higher bond yields if earnings remain resilient, but the Q3 reporting season and management guidance must validate elevated expectations.

• The US 10-year yield moved above 5% after the September view, while a further Fed tightening cycle of around 100 basis points would not necessarily undermine equities if growth and earnings hold up.
• Consensus S&P 500 Q3 earnings growth rose to 29.5% from 26.7% at end-June, with Energy, Information Technology and Financials leading upward revisions; all 11 sectors are expected to grow earnings year on year.
• Investors should examine how oil prices, AI infrastructure spending and bank lending, funding costs and credit quality affect the durability and quality of earnings growth.
• In the US, Candriam favours Healthcare, upgraded Information Technology to strategic overweight and Communication Services to overweight; Meta’s Muse launch is cited as a potential catalyst for broader consumer AI demand.
• In Europe, Banks and Financials, Telecommunication and Communication Services, and Transportation were downgraded, while Healthcare, Information Technology, Utilities and Industrials remain preferred; emerging-market leadership is narrow, with Brazil a key overweight after MSCI Brazil gained almost 15% following the first election round.

Takeaway: The constructive equity view remains conditional on credible earnings delivery and guidance, so investors should favour regions and companies with visible earnings, supportive valuations and the financial capacity to execute their investment plans.