Earnings, Politics and Purpose

An Exceptional Quarter for the Markets

With a gain of 15.3% in euro terms, the MSCI World Index recorded one of its strongest quarterly performances of recent decades. Such returns typically occur only in the aftermath of major crises or during periods of powerful market recovery.

What made the second quarter of 2026 particularly remarkable was that this rise took place while markets were already trading close to their historical highs and against an unfavourable backdrop marked by the conflict with Iran, a significant energy shock (the medium-term impact of which remains difficult to assess), persistent inflation, the gradual disappearance of expectations of central bank interest rate cuts, and a deteriorating geopolitical environment.

This outstanding performance can be explained above all by one key factor: the continued strength of corporate earnings.

The Return of Earnings as the Driving Force Behind Markets

The rise in equity markets during the first half of 2026 was driven primarily by robust earnings growth: +23% for S&P 500 companies and +11% for European companies in the second quarter.

After several years during which market performance was largely supported by the expansion of valuation multiples, the first half of 2026 marked a return to a market more firmly grounded in genuine earnings growth. As a result, despite this strong performance, valuations measured by the price-to-earnings (P/E) ratio (share price divided by earnings) remain far from excessive.

This development provides important support for equity markets. However, it also raises the bar: current valuations assume that companies will continue to deliver strong earnings growth. Expectations remain high, with market consensus still forecasting earnings growth of around 18% in 2027.

S&P 500 Valuation Reset: Price-to-Earnings Ratios Back to More Attractive Levels (2016–2026)

Central Banks Facing a New Equilibrium

The direction of monetary policy will remain a key determinant for financial markets. Investors will be paying particularly close attention to how central banks respond to the inflationary shock triggered by the conflict in the Middle East.

This issue is especially delicate in the United States, where the Federal Reserve has welcomed a new Chair, Kevin Warsh. His initial remarks suggest an approach that differs from that of his predecessors: less emphasis on providing immediate guidance on monetary policy decisions and greater focus on the principles that will underpin those decisions.

Fed Funds Rate: Historical Path (1993–2026)

Federal Reserve Projections (blue) versus Market Expectations (green)

This shift could give the Federal Reserve greater flexibility, but it may also increase uncertainty and market volatility.

In any case, the interest rate cuts that markets had expected for 2026 have largely been pushed back to 2027 (see chart above). If inflation proves slower to decline, with US inflation remaining above the Federal Reserve’s 2% target since March 2021, and if economic activity remains resilient, the Fed could be forced to keep rates unchanged or even raise them further. As in 2022, such an outcome would be unfavourable for financial markets. The European Central Bank has already begun to reflect this shift in outlook by raising its policy rates in June.

Markets are already beginning to price in a “higher for longer” interest rate environment. Gold, which traditionally benefits from periods of uncertainty and falling real interest rates, declined by 11.5% during the second quarter, its worst quarterly performance in a decade. At the same time, the US dollar appreciated by around 3% against the euro.

Market volatility could also be amplified by elevated levels of government debt. Increasing public financing requirements are now competing with the capital needed to develop the infrastructure supporting artificial intelligence.

Artificial Intelligence: A New Industrial Revolution?

Artificial intelligence is already a major force driving economic and financial transformation.

In financial markets, AI has had a profound impact on performance dispersion. 

Technology stocks delivered strong gains (Nasdaq +22.4% in the second quarter), while some software companies came under pressure as investors questioned the sustainability of their business models in the AI era. By contrast, semiconductor manufacturers benefited from exceptional investor enthusiasm, rising by approximately 75% during the quarter, driven by exploding demand for computing power.

Yet the implications extend far beyond financial markets. The investment required to build AI infrastructure is unprecedented in scale. According to Goldman Sachs, nearly $7.6 trillion could be invested in artificial intelligence infrastructure between 2026 and 2031.

Relative to GDP, this effort is comparable to the major investment waves that accompanied the expansion of the railways in the nineteenth century and the electrification of economies in the early twentieth century. As with previous industrial revolutions, investment significantly precedes the productivity gains it is expected to generate.

History shows, however, that every major investment cycle goes through a phase of exuberance followed by consolidation. Railways, electricity and the internet all experienced periods during which expectations temporarily outpaced the value creation capacity of the businesses involved.

Nevertheless, the infrastructure built during these periods laid the foundations for decades of economic growth. The key question for artificial intelligence is therefore probably not whether it will transform the economy, but rather which participants will capture the value created on a lasting basis and at what cost investors will have financed that transformation.

Artificial Intelligence: A Question of Purpose

Beyond its economic consequences, the most fundamental issue raised by artificial intelligence concerns the way it will reshape our lives.

It is precisely this question that Pope Leo XIV addresses in his first encyclical, Magnifica Humanitas.

Its central message is clear: the true challenge of artificial intelligence lies not only in its computational power but also in its purpose. AI can increase productivity, accelerate research and create new wealth, but it can never replace moral responsibility, human judgement and wisdom. Technological progress is fully human only when it remains oriented towards the person and the common good.

Chapter IV of Magnifica Humanitas emphasises that the success of this revolution should not be measured solely by the economic growth generated by AI, but also by its ability to safeguard three essential goods: truth, work and freedom.

Thus, while markets celebrate the expected productivity gains brought about by artificial intelligence, the encyclical invites a broader reflection. True progress is measured not only by rising earnings or expanding technological capabilities, but also by the extent to which these advances contribute to human dignity and the common good.

In the face of AI, the proper attitude is therefore one of confident vigilance. This requires a critical assessment of initiatives seeking to blur the distinction between human and artificial intelligence, while also maintaining close attention to the organisations developing these technologies, the capital financing them, and the purposes guiding their development.

Few examples better illustrate the speed of this transformation than OpenAI. Founded in 2015 as a non-profit organisation, the company behind ChatGPT now stands at the centre of a global investment race that, under some scenarios, could lead to a valuation approaching $1 trillion.

This evolution perfectly encapsulates the paradox of artificial intelligence: born from an ambition to serve humanity, it has become one of the greatest industrial and financial challenges of the twenty-first century.

From the Industrial Revolution to the Digital Revolution

Magnifica Humanitas follows in the tradition of the Social Doctrine of the Church, notably initiated by Leo XIII through Rerum Novarum (1891), which responded to the upheavals brought about by the Industrial Revolution.

Today, the challenge is similar: to accompany a new technological revolution while ensuring that economic progress remains at the service of the human person.

The fundamental question therefore remains unchanged:

How can we ensure that economic and technological progress continues to serve humanity?

The School of Athens: An Image of the Dialogue Between Intelligence and Wisdom

Raphael’s fresco, The School of Athens, located in the Raphael Rooms of the Vatican, depicts the great figures of classical philosophy.

At the centre of the composition, Plato points towards the heavens, symbolising the world of ideas, while Aristotle gestures towards the earth, representing the tangible world and human experience. This contrast illustrates a fundamental tension: that between the search for higher principles and careful attention to reality.

The fresco stands as a manifesto of Renaissance humanism: humanity is placed at the centre of the universe, capable of understanding and transforming the world through the power of reason.

The School of Athens is a fresco by the Italian painter Raphael, located in the Room of the Signature within the Vatican Museums, one of the four Raphael Rooms (Stanze) situated inside the Apostolic Palace.

At a time when artificial intelligence is reshaping our world, this fresco retains a striking relevance. It reminds us that human intelligence is defined not only by its capacity to accumulate knowledge, but also by its ability to seek truth, discern what is good, and give meaning and purpose to its actions.