U.S. markets are turning their attention to earnings season as geopolitical and tariff-related fears fade, leaving investors to assess whether strong corporate results can justify elevated expectations. While margins and earnings growth have been resilient, market reactions suggest optimism may already be priced in.
BNN Bloomberg spoke with Garrett Melson, portfolio strategist at Natixis Investment Managers Solutions, about earnings trends, equity leadership, interest rates and where investors may find opportunities as growth expectations are recalibrated.
Key Takeaways
- Earnings beats remain solid, but muted price reactions suggest markets have already priced in much of the optimism.
- Growth is expected to hold near trend, limiting the case for sustained small-cap outperformance despite easier financial conditions.
- AI-related capital spending continues to support select technology, materials and industrial companies, even as leadership broadens.
- A weaker U.S. dollar and easing financial conditions are supportive for emerging markets alongside steady global growth.
- U.S. interest rates appear range-bound, with carry becoming a key driver of returns as bond market volatility compresses.
Read the full transcript below:
ANDREW: Fears around Greenland and a possible tariff war launched by the U.S. against European NATO allies that do not toe the line, according to U.S. President Donald Trump, have dissipated. The focus has now shifted to earnings season. We are joined by Garrett Melson, portfolio strategist at Natixis Investment Managers Solutions. Garrett, great to see you. Thanks very much for joining us. What themes are you watching in the current earnings season?
GARRETT: Time and time again, corporate America has shown it can deliver. Companies continue to drive solid top-line growth and, more importantly, expand margins. That has been a key reason markets have remained resilient over the past couple of years and why valuation multiples have continued to grind higher. We hear frequently that markets are expensive, but these are high-margin, high-quality businesses, and those tend to command higher multiples.
It is still early in the season, but we are now entering the heart of it. Top-line and bottom-line beats have been solid, albeit a bit softer than last quarter. Expectations coming into the quarter were elevated, and we did not see the typical downgrade cycle to the same degree as usual. That arguably raised the bar, but so far, results have been fairly decent.
What we are really watching, though, is the price reaction. That has been relatively weak. It is still early, but it is something we are monitoring closely because the reaction to earnings generally matters more than the earnings themselves.
ANDREW: To clarify, you mean the market’s reaction to earnings surprises or guidance, whether bullish or bearish?
GARRETT: Exactly. The reaction to the news gives you a sense of what expectations were and what was already priced in. That is key to identifying opportunities. The last time I checked, price reactions to double beats — companies beating on both revenue and earnings — were the weakest since 2000.
Again, it is early, and markets have had a strong run, particularly as investors have priced in a reacceleration narrative in the U.S. But it does suggest that a lot of optimism is already embedded in prices.
ANDREW: There has been a lot of talk that small caps are finally going to have their moment. We did see the Russell 2000 hit a record high not that long ago, but your bias remains toward large caps.
GARRETT: It does. In the current environment, small caps can probably continue to perform in the near term. The small-cap trade typically rests on three pillars: valuation, the rate and financial conditions backdrop, and growth.
The valuation discount is clearly there. Financial conditions have also eased meaningfully, and while expectations for rate cuts this year have been pushed out, the Federal Reserve’s easing bias still appears intact. The real question is growth.
Our view is that consensus expectations are becoming overly sanguine. Growth should be decent, but it may not be strong enough to drive a durable period of small-cap outperformance. We may see another false start, similar to what we have seen several times over the past few years, unless growth accelerates in a sustained way and is not simply driven by a one-off fiscal impulse from tax cuts.
ANDREW: You are neutral on technology and have suggested investors should put less emphasis on companies benefiting from massive AI-related capital spending.
GARRETT: I would actually argue that AI capex beneficiaries remain an area of opportunity. Capital spending tied to AI is still substantial this year, and we already have visibility into capex plans from the mega-cap technology companies.
The reason to be more neutral on technology and the broader growth complex is that growth is holding up reasonably well. That tends to support solid nominal GDP growth, which in turn supports revenues and earnings. It also opens the door for leadership to broaden, with value and cyclicals playing more of a role.
The monolithic AI trade has clearly fractured. Markets are rewarding winners among hyperscalers and punishing relative losers. That creates a tug of war within major indices and opens the door for other sectors, and for more equal-weighted technology exposure, to contribute to leadership rather than just the so-called Magnificent Seven.
ANDREW: What types of companies tend to benefit most from AI-related capital spending?
GARRETT: Within technology, it is the companies that feed into the data centre buildout. One company’s capex spend becomes another company’s revenue and earnings. That dynamic should remain supportive.
You can also extend that beyond technology. Materials have benefited from strong demand tied to data centres and infrastructure. There is also growing demand linked to higher defence spending and broader industrial activity. Together, these multiple sources of demand can support earnings growth and, potentially, valuation expansion across the cyclical complex.
ANDREW: You also see promise in emerging markets. With the U.S. dollar near a four-year low against major currencies, is that supportive for emerging markets?
GARRETT: It is an important factor. We have seen a notable shift in dollar sentiment recently. While movements in the Japanese yen have played a role, the dollar has weakened more broadly against major and emerging market currencies, breaking below its recent highs.
A weaker dollar typically supports easier financial conditions, which is constructive for emerging market economies. Combined with reasonably solid global growth, that backdrop tends to support emerging market performance, and we think that theme can persist this year.
ANDREW: Finally, what is your view on U.S. interest rates, particularly the 10-year Treasury yield?
GARRETT: We are settling into an environment where the big macro swings of recent years are compressing. You can see that in declining bond market volatility. The trading range for the 10-year yield is narrowing, and a range of roughly four to four-and-a-half per cent seems reasonable.
There is room for short-term overshoots driven by shifting narratives, but the larger risk may be to the downside if the anticipated fiscal impulse disappoints and labour market cooling continues. If that happens, we could see a narrative reset and lower yields.
The bigger story, in my view, is that rates have become a carry trade. Nominal and real yields remain attractive relative to the past decade or more.
ANDREW: Garrett, thank you very much.
GARRETT: Thanks for having me.
ANDREW: Garrett Melson, portfolio strategist at Natixis Investment Managers Solutions.
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This BNN Bloomberg summary and transcript of the Jan. 27, 2026 interview with Garrett Melson are published with the assistance of AI. Original research, interview questions and added context was created by BNN Bloomberg journalists. An editor also reviewed this material before it was published to ensure its accuracy and adherence with BNN Bloomberg editorial policies and standards.
