In the face of higher (for longer) interest rates, equity markets have been drawing support from companies reporting better-than-expected earnings and, indeed, the results so far for the first quarter have been encouraging.
There are differences. Headline year-on-year earnings growth rates have not been so positive for value stocks in the US (e.g., those in the Russell Value index) or in Europe. However, growth rates have been quite positive for the technology-oriented NASDAQ 100.
Declining oil prices have been a key factor behind weaker non-tech earnings. Excluding the energy sector, growth rates have looked much better.
More importantly, however, is how earnings have come in relative to market expectations. Earnings surprises across all the indices have been quite strong, suggesting that companies have done better than forecast while interest rates remain high.
Assuming that market expectations for interest rates (and real yields) do not move much higher, earnings should remain the chief driver of equity markets. And as long as the slowdown in economic growth that we are currently seeing does not go too far, earnings should continue to rise.
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