The US and China are going back and forth on trade, and investors are navigating the waters, but that's not the only thing they're focusing on.
America's largest banks have now reported earnings and the revenue is benefiting from a strong deal-making environment with M&A, along with fixed income trading, driving bank revenue.
Seeing AI plans in the reports.
Joining me this morning to weigh in is Christoph Kleisch, president and CEO of Harbor Capital.
Good morning, Christo.
Thank you so much for joining me.
So we are in the midst of official earnings season.
So what are you watching for when it comes to the results as well as guidance?
Uh, good morning, Remi.
So yes, we're, we're just beginning, just kicking off earnings season, and I think there's really so we're bifurcating the market into two.
There's the, um, the cohort of AI and technology, and what's happening there, and then there's if you like, there's the non-AI, the more sort of traditional sector.
And a kickoff of earnings this week we've seen a bit of both, uh, clearly in the US we've seen banks report and I think report pretty robust earnings, um, that, that are showing an economy that is resilient, is growing, and actually we think has the potential to accelerate into 2026.
And then on the AI side, which will come later in earnings season, we'll be looking for the top line growth to make sure is this AI.
A secular theme that's underpinning markets still intact.
Yeah, and Christoph, you mentioned the big banks as well as AI and we will be listening closely to those earnings calls in terms of guidance on what to look forward to, but aside from earnings, what factors are driving US equities?
So look, I think we had a very volatile beginning of this year where we saw a lot of the negative consequences of the incoming administration's policies, namely tariffs.
We, we feel tariffs have now largely been settled into the background.
Yes, there's still some ongoing back and forth with China around rare earths at the moment.
We don't expect that to escalate.
We expect that to be resolved relatively quietly.
Um, and now what we think you're going to begin to see is a transition to some of the more positive policies from this administration, such as the effects of the One Big Beautiful Bill Act that was passed.
And so what we think we're going to see now is we're going to see a re-acceleration of growth as we head into 2026, and we think now is a time to be, you know, certainly invested, be in the markets, and be overrate risk.
Um, so it's a bit of a funny market.
On the one hand you have a pretty robust outlook driven by those solid fundamentals, and accelerating, um, economy, but on the other hand you have this debasement trade that is happening at the same time, which I think can be confusing for investors.
Yeah, and you mentioned policy, so of course we're paying attention to fiscal policy, economic policy, not to mention monetary policy.
So given the current environment, how do you feel about small caps?
So interestingly, we just added to small caps last week and so if you look at earnings this earnings season, an incredible statistic is that 50% of the earnings growth, we expect earnings growth to be about 10%, 11% year on year, 50% of that is coming from just six names the usual suspects, you know, the Nvidias, the Microsofts, the Apples, the Googles of this world.
And it's, um, kind of it's been driven by this AI theme.
We actually think there's a catch-up trade that's gonna start to happen and it's gonna be happening in small caps.
You know, small caps have been overlooked for a number of years now, and you're going to begin to see a trickle down, uh, you know, as these data centers, you know, I was in the state of Texas.
Just last week, there are data centers currently being constructed that are the size of Lower Manhattan where you are, um, and this requires power generation, power transmission, you know, concrete steel to build the warehouses, not to say everything that goes inside the data centers.
And as this spend begins to trickle down through the economy, we think small smaller cap companies, these specialized niche companies that provide this industrial equipment needed for this capex boom.
They're, they're going to benefit and we think that's going to be a secular underpinning for small caps, uh, over the next few years.
We do think it's an area though where investors have to be selective.
It's certainly one where we think, um, having an active approach rather than a sort of an index or a passive approach makes makes a lot of sense because there are still a lot of unprofitable small caps that we try and stay clear of.
Well, Christo, thank you so much for joining us.
You're able to cover a lot of ground, literally and figuratively, so thank you so much for sharing all of your insights today.
Thank you.
