Earnings or valuations what’s really driving markets

Earlier this week, we saw a headline that the valuation on Korean equities had fallen to the lowest level since the Global financial crisis. This came after a period of strong performance from Korean equities, so we wanted to dig into equity valuations and earnings a bit more. 

We think that the focus shouldn’t be so much on the headline equity valuations, but rather more on corporate earnings. Earnings growth has been strong, and expectations have risen. How long that can continue is one of the key questions for investors as we head into the second half of 2026 and into 2027.

A few points to set the scene. Global equities did pretty well in the first half of the year, up around 12% in sterling. That comes on the back of two strong years of performance during 2024 and 2025. The chart below shows the performance over the past three years.

After three years of strong performance, you might be concerned that investor expectations are too high. The chart below shows the forward Price/Earnings ratio for global equities over the past decade. It’s been quite volatile – investor expectations, at least on this measure, have moved around quite a lot. Currently, global equity valuations are above their long-term average, but some way below their recent peaks in 2020 and 2025. 

Let’s now turn to corporate earnings. The chart below shows 12-month trailing earnings for an index of global equities. The message here seems pretty clear, corporate earnings have been rising pretty steadily over the past three years, and that’s picked up steam in the last few months. Earnings from the technology sector has been a key driver.

We see a similar picture if we look at earnings forecasts. The chart below shows expected 2026 earnings growth for global equities, based on analyst forecasts. Those expectations were pretty healthy at the start of the year, between 14 and 15%. According to these figures, analysts in aggregate are looking at around 28% earnings growth for the full year, which is really fast.

Let’s turn back to Korean equities, which are showing a more extreme version of this trend. The chart below shows the Price/Earnings ratio for Korean equities, showing the lowest valuation in at least the last 15 years. 

That’s on the back of a dramatic increase in earnings expectations for 2026, where analysts see earnings in Korea tripling this year compared to 2025 on the back of strong demand for semiconductors and memory chips. 

So, where does all this get us? 

First, we’d argue that this is all about earnings. Earnings expectations, however, have increased sharply – driven by global tech companies. That’s a trend we’ve seen over the past few years. At the moment, we don’t think equity valuations like the forward Price/Earnings ratio provide much of a signal for equity returns over the next year. Headline equity valuations are above their long-term averages, at least for global equities, but have drifted lower over the past few months. 

The question is how much should we extrapolate this strong earnings growth into the future. In the long-term, we don’t think it’s plausible that listed companies in aggregate can sustainably grow their earnings at 20% per year. That’s not a very heroic assertion and still leaves a pretty wide range of scenarios will we see corporate earnings peak in 2026 or 2027, or can company earnings continue to grow even from a high base? 

In this case, the Korean example is interesting. The combination of low valuation and strong earnings growth is typical for cyclical businesses. Based on these valuations, we think investors aren’t projecting strong earnings growth into the future. Increases in capacity to supply memory and semiconductors could create a more competitive environment in the next few years.

So, as we head into the second quarter earnings season in the US, we’ll be looking carefully at the results and the outlook for corporate earnings. We’ll be focused not just on how the big tech businesses are performing, but also for signs that their customers – non-tech businesses – are beginning to see the benefit for all the AI investment.