Earnings season in the US begins with more reasonable valuations, but focus shifts to forecasts. Federated Hermes warns AI must start generating returns.
The earnings season for companies in the United States has started with solid fundamentals, but the real test for listed companies will be to demonstrate that artificial intelligence (AI) is starting to become profitable. Investors are no longer satisfied with promises of investment: they want to see returns.
Louise Dudley, global equity manager at Federated Hermes, points out that markets seem to have become less sensitive to geopolitical tensions, such as those in the Strait of Hormuz. The recent pause from AI-linked companies has allowed some valuations to moderate, which were still high.
Forecasts Matter More Than Quarterly Results
With major indices trading above their historical valuation averages, the market will demand convincing messages about growth, margins, and demand. Guidance from management teams will be more important than the published figures.
Federated Hermes will be particularly attentive to any signs of deterioration in US consumer confidence. A weakening in consumption could become one of the main risks to corporate forecasts. Household spending is a key thermometer for the economy.
AI Must Monetise the Huge Capital Expenditure
Enthusiasm for artificial intelligence remains, but the focus has shifted. Investors want to see if the huge capital expenditure of the major hyperscalers generates sufficient returns. So far, companies have invested billions without a clear correlation to revenues.
Louise Dudley finds it encouraging that the first signs of monetisation are beginning to appear. The expansion of stock market leadership within the AI ecosystem also continues to be a relevant source of profitability. Software and semiconductor companies are in the spotlight.
Opportunities in Financials, Industrials, and Consumer
Corporate fundamentals remain solid and the overall environment for the US stock market continues to be favourable. After the recent adjustment, valuations offer a more balanced starting point for the season. Federated Hermes maintains a constructive outlook.
The manager identifies attractive opportunities in the financial, industrial, and consumer sectors, where market expansion could continue to generate new sources of profitability. For the individual investor, this means that diversifying into these sectors may be a prudent strategy in a high-interest-rate environment.
The earnings season will extend over the coming weeks. Investors will need to pay attention not only to the figures but also to the tone of executives regarding the future of AI and consumption. The coming weeks will be key to confirm whether the market can sustain current valuations.
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