Tech profits steady Wall Street nerves

Wall Street’s latest rally is being driven less by relief over geopolitics than by a force investors can measure more easily: earnings. Morgan Stanley strategists say the strength of US corporate profits, led by technology companies, is giving equities enough support to look beyond the market risks created by the Iran conflict and the disruption around the Strait of Hormuz.

The bank’s team, led by Michael Wilson, has pointed to a broad improvement in earnings revisions for the S&P 500 over the past month. Forecasts for the second quarter have moved higher by about 2 per cent, while estimates for calendar 2026 and the next 12 months have risen by roughly 3 per cent and 4 per cent respectively. That shift matters because rising profit expectations are often a stronger guide to equity direction than political shocks, provided the shock does not turn into a deeper economic rupture.

Technology has become the decisive pillar of that argument. The latest earnings season has shown that the largest US digital platforms continue to convert artificial intelligence demand, cloud growth and advertising resilience into higher margins. Communication services and information technology have been among the strongest contributors to S&P 500 profit growth, with several megacap companies delivering earnings expansion far above the broader market.

The market reaction has reflected that split. The S&P 500 and Nasdaq have been trading near record territory even as oil prices remain elevated and shipping risks in the Gulf continue to cloud the inflation outlook. Investors have been willing to absorb the geopolitical premium because corporate results have reinforced expectations that the AI investment cycle is not fading. Capital spending by Microsoft, Alphabet, Amazon and Meta is now expected to remain exceptionally high this year, supporting demand across data centres, cloud infrastructure, semiconductors, networking equipment and power systems.

That optimism has extended beyond US equities. Asian chipmakers exposed to high-bandwidth memory and AI servers have rallied as investors reassess the durability of the semiconductor cycle. SK Hynix, Samsung Electronics, Taiwan Semiconductor Manufacturing Co and major equipment suppliers have all become important gauges of whether the AI build-out is broadening or merely concentrating gains among a handful of US platforms.

Morgan Stanley’s view does not suggest that the Iran conflict is irrelevant. Oil above $100 a barrel, tanker disruption near the Strait of Hormuz and uncertainty around US-Iran diplomacy remain clear risks for inflation, consumer spending and corporate margins. A prolonged shock to energy supply could complicate the Federal Reserve’s policy path, tighten financial conditions and erode the earnings resilience now supporting share prices.

The crucial distinction is that investors are not treating the conflict as the dominant market driver for now. Equity pricing suggests that the war premium is being offset by visible earnings momentum, especially in sectors where revenue growth is still accelerating. Technology, communication services and parts of consumer discretionary are masking weaker trends elsewhere, including among companies more exposed to fuel costs, lower-income consumption and supply-chain pressure.

That concentration is also the main vulnerability. A market rally carried by a narrow group of companies can appear stronger than the underlying economy. If AI spending fails to translate into sustained revenue, or if investors begin to question the returns on hundreds of billions of dollars in infrastructure investment, the same stocks now cushioning the index could become a source of volatility.

For now, the earnings data have given bulls a stronger hand. The proportion of S&P 500 companies beating revenue expectations is running above long-term averages, while profit margins have stayed unusually firm despite higher wages, energy costs and financing expenses. That has helped revive confidence after earlier concerns that tariffs, inflation and war-related uncertainty would squeeze corporate guidance.