Once again corporate profits are taking center stage. In a market defined by persistent but increasingly supply‑driven inflation, a powerful AI‑led capex cycle and global fragmentation—as highlighted in our Mid‑Year Outlook—U.S. equity sector positioning is becoming less about timing macro turns and more about the strength and breadth of corporate earnings.
Profits are driving stock market returns as investors focus on fundamentals and shake off episodes of market volatility. In particular, investors are homing in on broadening capital spending across AI infrastructure, defense, energy security and strategic manufacturing. This increased capital investment generally supports companies with pricing power and balance sheet strength, as well as exposure to scarce assets.
What are the implications for sector positioning? The capex trend favors sectors that benefit from capital intensity and structural long-term demand. In addition, recent market volatility has made these sector valuations more attractive as earnings have been revised higher over the same time period.
As outlined in our GIS View, we are positive on four U.S. equity sectors: Financials, industrials, information technology, and utilities and energy infrastructure. Here, we make the case for our optimistic outlook.
Large, high-quality banks remain well positioned in the current rate environment, which we describe as “higher-for-longer but stable.” Net interest margins continue to benefit from elevated rates and a steepening yield curve. Resilient credit fundamentals and strong capital positions support earnings durability and downside resilience.
As the chart below highlights, bank loan growth is reaccelerating. Those higher lending volumes are giving an incremental boost to earnings. Demand for financing, particularly tied to infrastructure and capital markets, remains supportive. Importantly, though, financial firms have been disciplined in their balance sheet management.
Valuations of financial stocks have declined amid ongoing macroeconomic uncertainty. But the sector’s fundamentals remain intact—leaving financials well placed to absorb market volatility while sustaining earnings power.
The Industrial sector is in the thick of a multi‑year investment cycle, one that is defined more by structural demand than cyclical recovery. Factors spurring that structural demand are: defense spending, infrastructure buildout, AI-related capex and reshoring initiatives.
As the chart below highlights, hyperscalers (the five tech giants that provide cloud computing at scale) are boosting their capex spending at a healthy clip. But capex is not just a tech story. Money is moving into a range of capital-intensive industries, from power equipment and construction to various types of advanced manufacturing. Together, they illustrate the breadth and depth of the industrial cycle.
Unlike some past iterations, today’s cycle is increasingly shaped by scarcity—of capacity, labor and critical inputs. That scarcity leads to constrained supply chains and long lead times for purchases. Shortages will likely reinforce pricing power for capital-intensive businesses, which could in turn make their earnings more durable.
Margin pressures and supply chain bottlenecks could challenge the durability of those earnings, and we are keeping an eye on both fronts. But in recent quarters we’ve had greater visibility into industrial demand and long‑term earnings growth for industrial companies. In short: We see a constructive outlook for industrial stocks over the coming year.
Information technology remains the core driver of S&P 500 earnings as an AI-led capex expansion is reshaping corporate spending priorities across the economy. Investment in semiconductors, data centers and AI-enabling infrastructure is driving strong earnings growth and improving revenue visibility.
As illustrated in the chart below, tech earnings growth has been resilient, with a clear reacceleration in recent quarters. Forward estimates point to above-market growth, bolstering investor confidence in the sector’s earnings outlook.
Within the sector, dispersion is increasing. The environment increasingly favors capital-rich, infrastructure-oriented companies, particularly semiconductors and hardware, over purely software- driven growth models.
Recent valuation compression reflects macro volatility and not a deterioration in fundamentals. As we’ve discussed, we see a bright outlook for tech earnings, underscoring the sector’s role as a central pillar of growth and innovation in the U.S. economy.
Utilities and energy infrastructure combine defensive cash flows with growing exposure to structural demand. Electrification, AI-driven power consumption and grid modernization are shining a spotlight on the economy’s need for long-term energy investment and the sector’s strong earnings prospects.
Forecasters project that electricity demand will exceed current generation capacity over the coming years, as the chart below illustrates. A sustained supply-demand imbalance will support companies’ pricing power. We think it will also underpin a multi-year investment cycle across electricity generation, transmission and grid infrastructure.
Energy reliability and resilience have taken on greater importance in a more fragmented world. For policymakers as well as CEOs, energy infrastructure has become both an economic and a strategic priority.
While the sector faces near-term pressures ranging from regulatory challenges to localized supply constraints, we believe it will be a major beneficiary of long-cycle infrastructure investment.
Across sectors, we identify a clear unifying theme. Durable earnings backed by structural demand are increasingly separating the winners from the rest of the pack. Periods of volatility are creating opportunities to reengage with high‑quality businesses whose fundamentals remain very much intact. As we’ve discussed, investors can focus on companies with pricing power, balance sheet strength and visibility into long‑term demand to mitigate macro uncertainty and unlock potential returns.
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