Earnings in the Driving Seat!

The North American equity markets continued to witness choppy trading during the month of July as investors vacillated between the narratives on artificial intelligence (AI) infrastructure spend vs monetization, the ambiguity and/or clarity on the Federal Reserve’s reaction function under the new Fed chair, and reduction vs escalation of the hostilities in the Middle East. The South Korean equity market witnessed extreme volatility with KOSPI Index dropping ~ -34% from the end of June to 30 July, before staging a partial recovery on the last day of the month to end the month at ~-22% (See Figure 1). The Index is dominated by two companies - Samsung Electronics and SK Hynix constituted ~ 53% of the Index weight as of 31 July 2026. The rush to benefit from the appreciating share prices of semiconductor companies has led the Korean investors to take leveraged bets on these companies through either use of leveraged ETFs or margin in their accounts. The speculation had helped the KOSPI Index rise by ~+101% from start of the year to June 2026. As investors took a pause and begun to question the monetization potential of investments in the AI Infrastructure, a correction in the AI names ensued. However, the correction in share prices of semiconductor names was more pronounced as the leveraged investors were forced to liquidate their positions. While the S&P 500 Index was flat at ~+0.09% for the month, the Technology sector heavy NASDAQ was down by ~-1.78% for the month owing to correction in AI names. S&P TSX Index was positive at +0.74% for the month primarily driven by higher energy prices.

 Figure 1: Korean Stock Exchange, KOSPI Index

December 30, 2025 to August 14, 2026 

Source: Bloomberg

It is evident from the second-quarter earnings season so far that the AI infrastructure providers continue to benefit from the capital expenditure spend from Hyperscalers and have not seen any slowdown. The earnings outlook has continued to improve, and the recent valuation reset provides an attractive entry point for the investors, in our view. That said, we note that investors have been reluctant to reward every beat-and-raise of the AI Infrastructure providers and have shown relatively more enthusiasm towards the software names that were sold on disintermediation fears but have demonstrated benefits from AI adoption in the recent releases. This suggests that the pendulum of expectations had swung too far in favour of the AI infrastructure providers. Nevertheless, the AI driven strong earnings of corporates continue to be in the driving seat of the overall markets, in our opinion.

The macro environment too has been largely conducive for the outlook of North American capital markets with downside inflation surprises and softer but not cracking labour market, i.e. less risk of wage inflation. This has alleviated some pressure on the Federal Reserve to hike interest rates which had gained momentum since the latest press conference of the new Fed chair, Kevin Warsh, after the Federal Open Market Committee (FOMC) meeting on 29 July. The committee decided to hold the interest rates at +3.75%. The strategy of maintaining ambiguity by the new Fed chair on the Fed’s reaction function to the economic data does not appear to have been liked by Fixed Income markets. Between the press conference on June 17th and just a day before the subsequent conference on July 29th, the yield curve between 2-year and 30-year had shifted upwards by ~10-to-16 basis points; predominantly on the back of hawkish stance projected by the new Fed chair. However, after the press conference on July 29th, while the short-end of the curve stayed anchored, the long-end of the curve jumped by ~18 basis points by July 31st, which left investors speculating if the Fed is losing control of the long-end of the curve (See Figure 2). Rising long-term yields can tighten the financial conditions and have implications on borrowing costs, equity multiples and other long duration assets. Looking ahead, we think a tantrum in Fixed Income markets could force the new Fed chair to reconsider the approach towards maintaining strategic ambiguity on forward guidance.

Figure 2: Rising long-term yields after FOMC meetings

Source: Bloomberg

The stalemate in the Middle East has continued with Strait of Hormuz still closed keeping the argument alive that acute shortage of crude oil might hit the world economy at some point as the strategic reserves are depleted. The US administration is now indicating it will adopt a strategy of putting economic pressure on Iran by using naval blockade, sanctions and other methods to coerce Iranian leadership to the negotiating table, while Iranian leadership’s latest stance is that they do not expect to hold a serious discussion with Trump administration and will wait until the term ends in January 2029. In other words, the world should prepare for disruption of crude supply for longer and potentially higher inflation in coming months.

Overall, stronger earnings continue to more than offset the rising risk of policy mistakes and higher inflation due to ongoing disruption in energy supplies. We think the economic data and news flow from middle east could remain source the volatility in the financial markets, however, stronger earnings make a strong case of net positive price action through the year.

Source: Bloomberg

Vipul Arora is a Portfolio Manager with CI Assante Wealth Management Ltd. The opinions

expressed are those of the author and not necessarily those of CI Assante Wealth

Management Ltd. Please contact him at 613-258-1997 or visit ofarrellwealth.com to discuss

your circumstances prior to acting on the information above. CI Assante Wealth Management Ltd. is a member of the Canadian Investor Protection Fund and the Canadian Investment Regulatory Organization. Insurance products and services are provided through Assante Estate and Insurance Services Inc