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  1. HSBC UK 
  2. Wealth 
  3. Insights 
  4. Investment Weekly 
  5. What to watch in Q2 profits season

Investment Weekly: What to watch in Q2 profits season

14 July 2025

Key takeaways

  • At first sight, you’d be forgiven for thinking that after a slow start to the year, US stocks have finally caught up with their European counterparts. In local currency terms, the performance differential between European and US indices has certainly narrowed – although it still favours Europe.
  • Foreign investments into Asian markets have risen sharply over the past 25 years. Global factors – like recent US dollar weakness – drive these flows, but local valuations, earnings growth, and supportive policy play an increasingly influential role.
  • The global landscape is shifting from a world dominated by a single economic power to one where influence is shared across multiple regions.

Chart of the week – What to watch in Q2 profits season

Q2 profits reporting season gets started in earnest in the US this week against a backdrop of continued uncertainty about further tariff announcements. A strong Q1, helped by firms frontloading ahead of expected tariffs, saw year-on-year profits grow by 13% – double consensus expectations at the start of the year. Today, all eyes are on whether Q2 will see something similar. Forecasts have been falling through the quarter – in part driven by tariff uncertainty – leaving expected year-on-year growth at a modest 5%.

The big question remains – will companies absorb tariffs, or pass them on? Evidence so far suggests that many are initially choosing to soak them up to protect market share. With net profit margin estimates at an above-average 12.8%, companies appear to have space to weather these headwinds. This implies margins may struggle to increase as analysts expect over the coming quarters, especially if the economy slows.

Meanwhile, last week’s news that Nvidia had become the first USD4 trillion market cap company is a reminder of the outsized influence of the technology and communication services sectors on the US stock market. Together, they account for over 60% of expected profit growth in 2025. However, tech sector valuations and profitability levels are back at all-time highs, which could make beating profit forecasts more challenging. So, while global investors can’t ignore US stocks (see page 2), dollar weakness and profits challenges indicate that US exceptionalism is fading, which should encourage a broadening out of performance globally.

Market Spotlight

Megatrend investing

A key investment attraction of listed infrastructure is its role as a long duration play that can potentially generate dependable cashflows and high dividend yields. For that reason, it tends to be a defensive, low volatility building block. So, it’s eye-catching that recent returns from listed infrastructure are linked to its strong connection to sectors involved in one of the biggest megatrends in global markets – AI.

Take the rapid roll-out of data centres in the US. Major construction of facilities to power AI has been an unfolding infrastructure theme for some time, and big-tech hyperscalers remain active in the sector. Meanwhile, data centres are fueling vast demand for power generation. Against a backdrop of the longer-term energy transition, this is driving investment in key areas like electrification, transmission, and distribution grids.

After a strong recent performance from the US infrastructure-related sectors, some infrastructure analysts think there could now be more compelling valuations found in Europe, the UK, and China on a relative basis. Meanwhile, at around 4%, the current average dividend from infrastructure is well above the average for global equities – reinforcing its appeal as a defensive income option for portfolios.

The value of investments and any income from them can go down as well as up and investors may not get back the amount originally invested. Past performance does not predict future returns. The level of yield is not guaranteed and may rise or fall in the future. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector, or security. Diversification does not ensure a profit or protect against loss. Any views expressed were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. Source: HSBC Asset Management, Bloomberg. Data as at 7.30am UK time 11 July 2025.

Lens on…

Spot the difference

At first sight, you’d be forgiven for thinking that after a slow start to the year, US stocks have finally caught up with their European counterparts.  In local currency terms, the performance differential between European and US indices has certainly narrowed – although it still favours Europe. But in euro terms, US stocks are still down 6% in 2025.

Much of the difference is to do with the weaker US dollar. Global investors normally leave equity allocations unhedged – because stock market volatility tends to dominate FX volatility – and for years exposure to the strong dollar has been a return driver. But that’s not the case this year.

Meanwhile, the recent pick-up in US momentum reflects a combination of investor relief post-Liberation Day, and resurgent interest in the AI and technology megatrend. And the tailwind of a weaker dollar boosts the profitability of the US’s world-leading exporters. So, even at today’s rich forward price/earnings ratio of 22x, and with weak macro vibes weighing on profits, investors can’t overlook US stocks. But it all makes for a complicated outlook for global investors, and a key lesson from H1 is that FX can’t be ignored.

Ebb and flow

Foreign investments into Asian markets have risen sharply over the past 25 years. Global factors – like recent US dollar weakness – drive these flows, but local valuations, earnings growth, and supportive policy play an increasingly influential role.

Research by some Multi-Asset analysts shows that the region is evolving in how it absorbs and responds to global economic forces. In the past, equity flows surged on tech-led booms in Taiwan and South Korea, and the economic rise of India and mainland China. But they partly reversed amid the post-pandemic slowdown and policy uncertainty. Big exporters saw sharp outflows, but domestically-focused economies in India, Indonesia and the Philippines were much more resilient. Bond flows were also vulnerable to macro shocks but have tended to be more stable, especially in markets with favourable policies and supportive structures, like ASEAN and mainland China.

Against a backdrop of fading US exceptionalism and a broadening out of global leadership, the research shows that Asian markets are becoming more resilient.

G-zero economics

The global landscape is shifting from a world dominated by a single economic power to one where influence is shared across multiple regions. The traditional dominance of the US or G10 economies is giving way to a fragmented “G-zero” landscape, where no single country has the capacity to lead. This presents complex dynamics and opportunities for investors.

One outcome has been a rise in geopolitical tensions. The number of international conflicts has increased in recent years, adding uncertainty to the macroeconomic outlook. It can contribute to an environment of frequent supply shocks, volatile inflation, and constrained growth.

Yet in a G-zero landscape, emerging and frontier markets – such as India, Indonesia, Brazil and Vietnam – are gaining economic and political influence. Many are building deeper trade relationships, investing in domestic capacity, and benefitting from demographic trends. These markets are well-positioned for future growth but are underrepresented in global portfolios. In a more fragmented world, diversification across these economies can help investors manage risk and access structural upside. 

Past performance does not predict future returns. The level of yield is not guaranteed and may rise or fall in the future. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector, or security. Diversification does not ensure a profit or protect against loss. Any views expressed were held at the time of preparation and are subject to change without notice. Index returns assume reinvestment of all distributions and do not reflect fees or expenses. You cannot invest directly in an index. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. Source: HSBC Asset Management. Macrobond, Bloomberg, Uppsala Conflict Data Program. Data as at 7.30am UK time 11 July 2025.

Key Events and Data Releases

Last week

The week ahead

Source: HSBC Asset Management. Data as at 7.30am UK time 11 July 2025. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector or security. Any views expressed were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. 

Market review

Risk markets were cautious ahead of the start of the Q2 earnings season in the US, with trade uncertainty weighing on sentiment. The US dollar index saw modest gains. US Treasuries were firm, supported by solid debt auction results. US IG and HY spreads widened, in contrast to narrowing corporate spreads in Europe. In stock markets, the S&P 500 hovered near its record high. The Euro Stoxx 50 advanced, and the UK’s FTSE 100 reached an all-time high, driven by strength in mining stocks. Japan’s Nikkei 225 lagged, as longer-dated JGBs weakened amid persistent fiscal concerns ahead of election. Other Asian markets broadly rose, with South Korea’s Kospi leading the rallies. Chinese equities also traded higher, but India’s Sensex declined. In Latin America, Brazil’s Bovespa fell on growth concerns and tariff uncertainty. Meanwhile, oil and gold prices consolidated.

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We’re not trying to sell you any products or services, we’re just sharing information. This information isn’t tailored for you. It’s important you consider a range of factors when making investment decisions, and if you need help, speak to a financial adviser.

As with all investments, historical data shouldn’t be taken as an indication of future performance. We can’t be held responsible for any financial decisions you make because of this information. Investing comes with risks, and there’s a chance you might not get back as much as you put in.

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