Higher earnings and strong growth rates come with a familiar side effect: higher valuations. Markets trade at different valuations. This happens because investors price in the future and the risks that come with it, not just the current earnings.
This opens the door to the debates around the fairness of valuations given the opportunities and risks. Investors have been feeling this valuation battle either explicitly or intuitively over the past couple of years.
Over the last month, there has been a consistent question from investors I've spoken with:
Where has the earnings growth come from?
It’s a great question and opens the door to several of the realities of today’s investment landscape. While artificial intelligence is part of the story, the full answer is broader.
A combination of progressive innovation and strong corporate management teams offers a fundamental explanation.
Sales Have Been Strong Across Regions
In every region there has been positive sales growth over the last decade, which has been a combination of competitive position, inflation, and innovation.
The “slow growth” environment that has concerned investors in the past, is refuted by the data. Sales have been growing and supporting expansion in the bottom-line earnings. Going forward agility and innovation will likely prove to produce additional sales growth.
Margins Have Improved
Margins have also expanded, from gross to net, profitability in developed markets has slowly but steadily improved.
It doesn’t take a lot of net margin expansion to have a material impact on earnings. For example, back in 2015 the European net margin was about 5.9% while in 2025 the net margin is 7.7%. That doesn’t sound like a lot but if the net margin was still 5.9%, the reported earnings in 2025 would have been about 23% less. That is material.
Looking Ahead to 2026
As we move into 2026, our focus remains unchanged: disciplined research, thoughtful risk management, and building durable investment portfolios such as Matco’s Global Equity Fund. The goal is to navigate the environment with consistency and to invest in businesses that can grow through a range of economic conditions.
If you’d like to review your plan or talk about how today’s backdrop may influence your long-term goals, I’m always happy to connect.