Key takeaways
- Q4 earnings growth in U.S. remains robust
- Equity leadership broadens beyond U.S. large caps
- Treasury yields fall despite strong economic data
Q4 earnings extend growth streak
The U.S. is on the back end of fourth-quarter earnings season, and the overall tone from corporate management teams has been constructive. For the S&P 500 Index, earnings growth tracked close to 15% year-over-year, marking a fifth consecutive quarter of double-digit growth. Management guidance looking ahead to the first quarter of 2026 reflects the strongest tone since 2021, reinforcing the durability of the earnings cycle.
Despite that strength, price performance has been more restrained. U.S. large cap equities have largely treaded water so far this year, even as fundamentals improved. Beneath the surface, single-stock dispersion has been elevated as markets reassess how AI could reshape business models and influence terminal values over the medium to longer term. This repricing dynamic has been particularly visible in parts of the software sector, where investors are differentiating more deliberately across companies based on perceived competitive positioning and earnings durability.
Diversification regains traction
Another theme this week was the continued benefit of diversification within equity markets. So far this year, market leadership has widened, with both non-U.S. stocks and U.S. small cap stocks outperforming U.S. large caps.
This shift aligns with one of the themes in our 2026 Global Market Outlook, which is that market leadership is likely to broaden out this year. Case-in-point: Through Thursday’s market close, the MSCI All Country World Index excluding the U.S. has gained 11%. Meanwhile, U.S. small cap equities have risen approximately 8% while their large-cap counterparts have advanced only 1%. This widening gap suggests participation is expanding beyond the narrow group of mega-cap companies that drove returns in prior years.
A curious move in U.S. Treasuries
Meanwhile, in the U.S. Treasury market, bond yields have moved lower even as the economic backdrop remains firm. This economic resilience is evident in the latest data. Recent reports have generally surprised to the upside, growth indicators are holding up, and the labor market — which led the Federal Reserve to lower rates late last year — appears to have stabilized.
Under those conditions, Treasury yields would typically move higher. Instead, over the past month, they’ve declined by more than 20 basis points. The yield curve has also “bull-flattened” — meaning longer-term yields have fallen more than shorter-term rates.
This is not the usual pattern when economic data is resilient, and it suggests investors are placing greater emphasis on managing risk. Ultimately, elevated equity volatility and uncertainty around how AI may alter parts of the market have likely contributed to flows into Treasuries.
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