1Q26_ Quarterly Outlook Report_Final_EN - Flipbook - Page 112
T H E P LUMB LI N E | A RETU RN TO F I RS T PRI N CI PL ES
Key conclusions
•
A neutral allocation to equities and fixed income is likely the most appropriate mix for
most investors, allowing for a balance between upside participation and downside
protection if markets come under duress.
•
While corporate profits may continue to grow, elevated valuations warrant caution,
leaving limited margin for error.
•
Fixed income attractiveness has improved in recent years, owing to the upturn in yields,
which are close to their highest levels in over 15 years. Starting yields are a key
determinant of future returns and currently imply a healthy outlook for fixed income.
•
Our equity risk premium framework implies a long-term earnings growth rate of ~ 6%.
This is above the long-run historical growth rate of nominal GDP, but history shows that
corporate earnings have consistently grown faster than the broader economy.
2025 turned out to be another strong year for global equity markets, with the MSCI World index
notching its third consecutive year of double-digit gains. This performance came against a
backdrop of elevated trade policy uncertainty and moderating economic growth that prompted
a peak to trough decline of >15%, before markets eventually recovered those losses, and then
some, turning in calendar year performance of 19% (USD terms). Fixed income also had a good
showing. Global sovereign debt, as measured by the Bloomberg Global Aggregate Treasuries
index rose 6.7%, while corporate credit, both investment grade and high yield, notched double
digit gains.
Fundamentals have been a key driver of strong risk asset performance. Global equities are on
pace for low double-digit earnings growth for FY2025, while earnings for the bellwether S&P 500
are tracking 15% growth. For the latter, the share of constituents reporting earnings growth as
well as those reporting positive earnings per share (EPS) surprises is above the historical average.
Earnings breadth has been stable in recent years with most companies managing to grow
profits and several exceeding expectations
100%
75%
50%
25%
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
Earnings breadth
Breadth historical avg
Positive surprises breadth
Positive surprises historical avg
2024
Source: Bloomberg Finance LP, Scotia Wealth Management | Earnings breadth refers to the share of S&P 500 companies reported annual EPS growth. Positive
surprises refers to the share of S&P 500 companies whose earnings exceeded analyst estimates.
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