In April, equities staged a swift and powerful rally. Tech outperformed. Semiconductor stocks in particular moved sharply higher, with the SOX Index posting near-vertical advances.
To many market participants, the rally came out of nowhere and seemed difficult to reconcile with the broader backdrop of ongoing geopolitical tensions, persistent uncertainty around rates and Fed policy, and mixed macroeconomic data. As fundamental stock pickers, however, we have always believed that earnings drive stocks — and from that perspective, April’s rally was no mystery.
As Q1 report season unfolded, investors quickly realized that earnings were being revised higher at a speed and magnitude rarely seen before. In our view, this served as the fundamental underpinning for the strong equity performance throughout April and into the first week of May.
The semiconductor sector’s seemingly extreme rally was also justified, as the underlying earnings revisions were as dramatic as the price appreciation itself. The market was not blindly expanding multiples but rather rapidly repricing future cash flows and earnings.
Likewise, the Nasdaq’s outperformance has been rooted in the tech sector’s continued leadership in earnings growth...
…and the advance in AI-related stocks has been driven by the significant divergence in earnings expectations between AI beneficiaries and non-AI companies.
Where do we go from here?
Stocks can experience price volatility driven by macro conditions, investor sentiment, and geopolitical developments, but the lasting impact of these forces ultimately depends on whether they alter the earnings trajectory of businesses. Over the longer term, stock prices gravitate toward earnings.
Importantly, earnings are not static. Expectations continuously evolve as new information emerges, and today’s markets incorporate that information faster than ever. The combination of abundant data and increasingly sophisticated analytical tools — including AI — has accelerated the speed at which markets process changes in fundamentals.
As a result, market moves can appear abrupt or disconnected in real time, but the underlying driver remains the same:
earnings.