U.S. earnings review and investor takeaways from Saturday’s Iran strike

Transcript

Well, hi. Welcome to Market Weekend Review for the week ending February 27th, 2026. I'm Paul Idamman from investment strategy here at Russell Investments. And I'd say three topics uh stand out uh from my perspective this week in financial markets. Uh first, we're now on the back end of the US earning season for the fourth quarter of 2025. And I'd say broadly speaking, the message from uh the corporate sector has been a positive one at the end of last year. We're tracking for the S&P 500 index, for example, close to 15% earnings growth on a year-over-year basis, which is strong. It would mark the fifth consecutive quarter of double-digit earnings growth. And I think in particular, we're seeing positive management guidance looking ahead into the first quarter of 2026. uh sort of the best uh tone from that perspective since 2021. So strong earnings fundamentals behind the market that hasn't translated into strong price performance for US large cap equities so far this year. They've been kind of treading water and single stock dispersion in particular has been extremely high here as the markets started to think about and try to price as best as they can some of the disruption from artificial intelligence onto the terminal value for a number of companies. thinking ahead over the medium to longer term. On that vein, I'd definitely encourage our listeners to check out the article from my colleagues uh Nick and Zoe that in particular does a little bit of a deep dive into some of the volatility in the software sector recently and the conclusions that we're hearing from our money managers. Uh the second theme that I'd highlight from this week uh is that this tone and theme of diversification within markets has continued to paid off. uh we're seeing an outperformance from uh non- US equities uh and even small cap equities within the United States market uh this year. So leadership uh appears to be broadening out which is one of the themes from our global market outlook for 2026. Uh if you look back uh year-to- date over 2026 so far, the Msei All Country World Index after stripping out the US equity market is tracking a gain of 11% so far this year through Thursday's close here in the United States. Uh meanwhile, small cap equities in the United States are up about 8% and large cap equities, which have really been uh the star of the show here for the last couple of years, are up only 1%. So, it's been a positive broadening out of market performance, uh, which is pretty encouraging to see. Um, third, and finally, um, there's a bit of a curious case going on within the US Treasury market right now. Uh, we're seeing a US economy that continues to look pretty strong. Most macroeconomic data has been largely speaking surprising to the upside. Uh if anything, the labor market, which had been a concern of the Federal Reserve and was part of why they cut interest rates late in 2025, appears to have stabilized recently. And yet, um over the last month, uh US Treasury yields have declined a little more than 20 basis points uh and have uh shown a bull flattening of the Treasury yield curve. And uh that's an unusual situation to have at a time that the economy is quite strong. it does seem to reflect at least to some degree uh this heightened volatility that we're seeing within the US equity market uh and a little bit of risk aversion starting to creep back in uh to investor preferences again and that driving some flows into the US uh treasury market. So I think those are the themes this week. Strong earnings uh diversification paying off and a moderate decline in treasury yields uh this week continuing a trend that we've seen over the last month. Thanks for tuning in. reach out with any questions. Thanks a lot. Bye. >> Hi, I'm Sophie Antaly, head of portfolio and business consulting at Russell Investments. If you liked what you just saw and heard, consider subscribing to our YouTube channel or check us out on LinkedIn. Thanks for tuning in.

Key takeaways

What to know about the Iran strike
Q4 earnings growth in U.S. remains robust
Equity leadership broadens beyond U.S. large caps
Treasury yields fall despite strong economic data

This article was updated Feb. 28 at 8:30 a.m. Pacific Time

Iran updates

The United States and Israel conducted a joint strike against Iran over the weekend. The main transmission channel from the ongoing conflict onto global markets would be if the Strait of Hormuz becomes disrupted – a passage through which 20-25% of seaborne oil trade and global liquids consumption transit each year.

As markets process this event over the coming days, it is important for investors to understand that from a macroeconomic perspective:

Oil shocks are less important to global markets than they were decades ago. At this time, we believe the strikes are unlikely to derail global fundamentals. This is because:
- The U.S. is now the world’s largest oil and gas producer.
- The U.S. is a net exporter of oil.
- Energy intensity has fallen dramatically — gasoline now represents ~2% of U.S. consumer wallet share, a fraction of prior decades.
- The global economy today is fundamentally different from the 1970s–90s oil shock era.

Investment implication: We would expect to maintain positioning, and potentially add on weakness, if the crisis in the Middle East drives short-term risk aversion without materially impairing fundamentals.

Q4 earnings extend growth streak

The U.S. is on the back end of fourth-quarter earnings season, and the overall tone from corporate management teams has been constructive. For the S&P 500 Index, earnings growth tracked close to 15% year-over-year, marking a fifth consecutive quarter of double-digit growth. Management guidance looking ahead to the first quarter of 2026 reflects the strongest tone since 2021, reinforcing the durability of the earnings cycle.

Despite that strength, price performance has been more restrained. U.S. large cap equities have largely treaded water so far this year, even as fundamentals improved. Beneath the surface, single-stock dispersion has been elevated as markets reassess how AI could reshape business models and influence terminal values over the medium to longer term. This repricing dynamic has been particularly visible in parts of the software sector, where investors are differentiating more deliberately across companies based on perceived competitive positioning and earnings durability.

Diversification regains traction

Another theme this week was the continued benefit of diversification within equity markets. So far this year, market leadership has widened, with both non-U.S. stocks and U.S. small cap stocks outperforming U.S. large caps.

This shift aligns with one of the themes in our 2026 Global Market Outlook, which is that market leadership is likely to broaden out this year. Case-in-point: Through Thursday’s market close, the MSCI All Country World Index excluding the U.S. has gained 11%. Meanwhile, U.S. small cap equities have risen approximately 8% while their large-cap counterparts have advanced only 1%. This widening gap suggests participation is expanding beyond the narrow group of mega-cap companies that drove returns in prior years.

A curious move in U.S. Treasuries

Meanwhile, in the U.S. Treasury market, bond yields have moved lower even as the economic backdrop remains firm. This economic resilience is evident in the latest data. Recent reports have generally surprised to the upside, growth indicators are holding up, and the labor market — which led the Federal Reserve to lower rates late last year — appears to have stabilized.

Under those conditions, Treasury yields would typically move higher. Instead, over the past month, they’ve declined by more than 20 basis points. The yield curve has also “bull-flattened” — meaning longer-term yields have fallen more than shorter-term rates.

This is not the usual pattern when economic data is resilient, and it suggests investors are placing greater emphasis on managing risk. Ultimately, elevated equity volatility and uncertainty around how AI may alter parts of the market have likely contributed to flows into Treasuries.

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