What the Headlines Are Missing

There are effectively two markets operating at the same time.

The first is the market we see every day in the headlines. It is driven by elections, geopolitical tensions, interest rates, inflation, trade policy and whatever story happens to dominate the news cycle that morning.

The second is quieter. It is driven by fundamentals: corporate earnings, cash flow, productivity, innovation and the ability of businesses to grow over time.

The challenge is that most investors spend far more time watching the first one.

There is a reason for that. Negative news attracts attention and triggers emotion. One study found that, on average, each additional negative word in a news headline increased the likelihood of someone clicking on the story.

I sometimes use a simple example to illustrate this. Hippos are responsible for more human deaths each year than sharks, yet how often do you see a headline about a hippo, unless it happens to be Christmas? Now imagine you're planning a beach vacation and, a few days before you leave, you see a story about a shark attack. You may find yourself thinking twice before jumping into the water. The headline has changed your perception of the risk, even though the underlying risk remains extraordinarily small. Sharks simply make for a much better story than hippos.

The same thing can happen in financial markets.

A market decline caused by a political headline or geopolitical event can dominate the conversation, even when the underlying businesses continue to perform well. Conversely, steady improvements in corporate earnings rarely make for exciting headlines.

That distinction is particularly important today.

Despite plenty of uncertainty in the headlines, the fundamental picture remains encouraging. Another strong US earnings season is underway, with the majority of S&P 500 companies reporting earnings above expectations. More importantly, analysts continue to expect earnings to grow in 2027 and 2028.

That matters because, over time, stock prices tend to follow the earnings and cash flows of the businesses they represent.

This doesn't mean the market cannot experience periods of volatility. It certainly can. Headlines will continue to move markets from one day to the next.

As portfolio managers, our job isn't to ignore the headlines. It's to understand them in the context of what is happening underneath the surface.

The headlines tell us what happened today. The fundamentals tell us where businesses may be going tomorrow.

Our focus remains on the second.