By Ben Leyland, senior fund manager of the JOHCM Global Opportunities fund
The latest earnings season has offered a useful reminder that the investment landscape is broader than the market headlines suggest, with a wide range of companies benefiting from long-term investment trends and improving fundamentals. Attractive valuations are creating opportunities in areas where concerns may have become overdone.
While AI offers significant long-term potential, its commercial development is still evolving, reinforcing the value of looking beyond the headlines to uncover a broader range of investment opportunities.
Index performance has become increasingly concentrated, with much of the debate on identifying the next AI winner. Yet, this earnings season has shown that other questions are equally interesting and perhaps easier to answer. While AI continues to dominate headlines, a much broader range of businesses are quietly delivering improving fundamentals, creating opportunities that continue to be overlooked.
Earnings growth extends well beyond AI
The clearest message from this reporting season is that meaningful earnings growth is not confined to AI. The evidence continues to point to a structural shift towards capital investment and infrastructure renewal in areas such as defence, energy and power infrastructure, electrification and automation, driving healthy revenue and profit growth for a range of companies.
Meanwhile, financials in Spain and Japan are benefitting from the shift towards higher inflation and interest rates and loan growth. These are long-term investment themes underpinned by structural trends in place since 2022, and very different from the preceding decades.
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We should acknowledge this optimism is not universal. For example, partly because of higher energy costs, European construction activity remains soft despite accelerated fiscal stimulus in places like Germany. Until this improves, investors will need to rely on careful stock selection and idiosyncratic drivers to generate returns in this part of the market.
The broader point is that markets are becoming increasingly concentrated, but corporate earnings are not. The investment opportunity set remains far broader than index performance suggests.
The structural challenges may be overstated
Several sectors that have been under pressure recently are showing early signs of stabilisation, at least selectively.
For example, earnings from some consumer staples companies are stabilising after a period in which the sector has been weighed down by weaker demand and rising input costs. It would be premature to forecast a return to strong growth, but the derating of recent years has created a solid starting point for generating attractive investment returns, particularly when combined with healthy dividend yields and resilient balance sheets.
Similarly, certain software companies continue to deliver resilient earnings growth, defying concerns that AI will disrupt their existing business models.
The key point is valuation still matters. Successful stock selection is about balancing execution with valuation, not simply finding the companies with the best earnings growth.
Current disclosure falls short on AI monetisation
Investment in AI infrastructure continues to accelerate at an extraordinary pace. However, we do not have sufficient visibility to determine whether this investment is profitable yet.
The listed hyperscalers are complex businesses playing multiple roles in the value chain. They are disclosing impressive growth in ‘AI revenues’ but that includes capacity rented to unlisted LLMs. It remains difficult to assess whether the value chain as a whole is profitable, i.e. whether revenues outweigh costs in aggregate.
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The other place one could look for evidence would be in ‘real world’ companies starting to use AI to transform their businesses and cost structures, but we do not see much evidence of this yet. Most businesses still seem to be in the experimental stage. IBM’s warning in mid-July that investment in AI infrastructure was beginning to crowd out spending elsewhere in IT was not reflected in the results reported by most other companies.
To be clear, we are not downplaying AI’s long-term potential. Rather, we are highlighting the gap between market enthusiasm and the evidence currently at our disposal. AI may well prove transformative over time, but the commercial economics, pace of adoption and ultimate returns remain uncertain. Investors should be careful not to confuse technological progress with proven monetisation.
Looking beyond the consensus
In today’s markets, the greater risk is not underestimating AI’s potential but overestimating its uniqueness and missing the broader range of opportunities. This earnings season suggests that while market performance has become increasingly concentrated, corporate performance has become increasingly broad-based.
Structural growth remains intact across multiple sectors, resilience is emerging where sentiment remains weakest, and portfolio returns are being supported by a wider range of drivers than current market narratives imply.
For long-term investors, such as ourselves, that distinction matters. The most compelling opportunities increasingly lie not in the companies already dominating headlines, but in the broader universe of businesses quietly delivering sustainable earnings growth, improving profitability and attractive long-term value.
The latest earnings season reminds us that markets often focus on where growth is fastest, while successful investing depends on identifying where there is the greatest disconnect between expectations and delivery.
