Q1 Earnings, April PMIs, Consumer Sentiment | 3 Things You Need to Know This Week

Transcript

Rachael Green:

Hello, and welcome to 3 Things You Need to Know This Week. Our regular series, designed to help you sift through the noise across financial media and understand what really matters for markets. To stay up to date with our latest market insights, subscribe to our YouTube channel or visit FisherInvestments.com. And with that, here are three things you need to know this week.

First, Q1 Earnings and Defense Stocks.

Q1 2026 earnings season continues this week, with several notable defense contractors reporting quarterly earnings. Across all sectors, analysts are expecting around a 13% rise in year-over-year earnings for the S&P 500. If that estimate holds, this would be the sixth consecutive quarter of double-digit earnings growth. Given the conflict in the Middle East, some investors may be wondering if defense industry stocks are likely to do particularly well this year. First, we think it's important to keep the defense industry in perspective. Defense stocks are part of the broader Industrial sector. The entire Industrial sector only makes up about 11% of the global stock market, and defense firms are just one slice within that 11%. Secondly, many investors assume war automatically boosts defense stocks due to higher demand for weapons, military equipment and more. But markets are efficient and rapidly price in widely expected events. Historically, defense stocks often rally ahead of wars, breaking out. But once the conflict actually starts, they can go on to lag to the surprise of many. For example, after Russia invaded Ukraine in early 2022, Aerospace and Defense stocks saw a short burst of outperformance, but after those initial spikes, they performed in line with global stocks and the temporary boost faded much sooner than many may have expected. We think it's important for investors to take a balanced approach to portfolio management. It's prudent to own stocks from a diverse array of sectors, which can include Industrial and defense stocks. But given the relatively smaller size of the defense industry, we'd caution investors from allocating too much of their portfolios in any one sector or industry. This can lead to concentration risk and could have real long-term consequences for portfolio performance if Industrial and defense stocks underperform the broader market.

Next, April flash PMIs.

This week, we'll get a fresh look at the state of the global economy with April flash purchasing managers indexes for the US, UK, eurozone and Japan. PMIs offer a near real-time snapshot of private sector activity, including critical portions of the global economy, like services and manufacturing. A primary focus in this month's flash PMI will likely be gauging the potential economic ripple effects of this year's Iran conflict. This will be the second month of PMI data released since the conflict began at the end of February. March's PMI readings showed a largely resilient global economy despite conflict related supply chain disruptions. They signaled continued private sector growth in the US, UK, eurozone and Japan, with composite readings above 50. The eurozone manufacturing PMI was notable because it jumped to 51.4, beating expectations and marking the strongest growth in three years. To us, recent PMI data highlights the underappreciated strength of businesses and the global economy. despite the Middle East conflict. But even if April PMIs turn contractionary in some economies, this wouldn't be unprecedented amid an ongoing bull market. What matters for stocks is the broader trend in economic activity and how reality compares to expectations. With many war related concerns circling over oil, inflation and supply disruptions, we believe there's ample room for reality to positively surprise ahead.

Finally, consumer sentiment hits new record lows.

Last Friday, the University of Michigan released its preliminary consumer confidence reading for April. The index fell sharply from March, missing analyst expectations and setting new record lows. This Friday, we'll get the final reading for April to see if this historic drop in consumer sentiment holds. We can look back at other recent low points to understand what this data really tells us. June 2022 marked the last major low for consumer sentiment. At that time, recession and inflation concerns dominated the news, while investors also grappled with a bear market. This historical context brings up an important question: Do the current economic fundamentals justify such a dismal consumer sentiment level? Often, they don't. It's not unusual to see a disconnect between how people feel and how stocks and the economy perform. And as we've mentioned before on this channel, stocks themselves are considered one of the best leading economic indicators. And just last week they reached new all-time highs despite war in the Middle East. Consumer sentiment surveys like this can create media buzz, but it's important to remember they aren't indicative of what's to come. For investors, dour sentiment like we've seen in this month's surveys can actually be a bullish indicator. That's because markets move most on the gap between expectations and reality. And when sentiment is lowered, that creates more room for reality to surprise to the upside. That's bullish for stocks.

And that's it for this episode of 3 Things You Need to Know This Week.

For more of our thoughts on markets, check out This Week in Review, released every Friday. You can also visit FisherInvestments.com. Thanks for tuning in, and don't forget to hit 'like' and 'subscribe'.