Constraints Beneath the Surface

Editor’s Note

Many would look at this week as being one where markets chose earnings over war. We view this as too simple an idea that doesn't get to the centre of things. What actually happened is that investors kept paying up for a small group of businesses with significant earnings growth and capital spending tailwinds, even as the macro environment showed signs of stress. In the U.S., the S&P 500 and Nasdaq closed at fresh highs and extended their winning streaks after a packed earnings week, but that rally sat alongside an uncertain rate backdrop at the Federal Reserve, still elevated oil sensitivity tied to Iran and the Middle East, and a macro mix with worry around inflation. Simply, price action was strong, but the underlying backdrop did not become easier.

This distinction matters because it changes how the rally should be read. This was not the market exonerating risk assets. It was the market saying that if earnings are good enough, it can temporarily tolerate higher for longer energy prices and a less comfortable policy path. This level of optimism was not reflected in frontier markets however, with frontier markets such as Kenya not not seeing a similar gain.

The core influence of global markets was earnings, however, the leadership was more discriminating. The headline U.S. indices rose to records and April became one of the strength months in years, helped by corporate results that now point to S&P 500 first quarter profit growth of roughly 27.8% year on year. What mattered, however, was that the market started separating which AI related spend it believes is already producing visible economic returns as against those working on narrative. Among the four “Magnificent Seven” reporters this week, Alphabet was received materially better than Meta Platforms, while Amazon and Apple were treated more as confirmation of resilience than as fresh upside moves. The broader point is that the AI trade is no longer one single factor. It is becoming an argument about payback, margins, and who can turn capex into earnings soonest.

The Federal reserve held rates at 3.50% to 3.75%, but what was more important was the fact that the split was 8 to 4, which is the most divided decisions since 1992. What added to the complexity was Jerome Powell saying that he would remain on the board after the end of his term as Chair, which is unconventional for retiring Federal Reserve Chairs. Kevin Warsh on the other hand advanced through the Senate Banking Committee. The practical implication is that the market is now dealing with both a more difficult inflation problem and a leadership transition that could make setting policy more contested than before.

Adding to the uncertainty of the week was the unresolved conflict in the Middle East. Talks seems to have slowed, with President Trump saying he was not satisfied with the latest Iranian proposal. Military activity in southern Lebanon remained as Israel warned residents to evacuate areas near renewed operations targeting Hezbollah. Oil markets reacted to these unresolved conflict with Brent Crude spiking as high as $124.41 a barrel on Thursday before easing back after a new peace proposal. The United Arab Emirates leaving OPEC+ was a clear indication of the growing hostilities in the Middle East.

Europe was a clear reminder that not all developed market equities were reading from the same script as the U.S. The European STOXX 600 hit a near three week low earlier in the week, and by the time the European Central Bank held rates steady, the conversation had shifted towards whether June would bring the first of several hikes. This combination highlights the extent to which the European backdrop for equities is less promising than the U.S. mainly cause of their direct exposure to the energy shock, with an inability to offset this shock through record earnings for European companies.

One political signal worth watching from the week is the visit of King Charles III to the U.S. In his speech to Congress, he argued for continued support for Ukraine and for translation cohesion. Market did not reprice this, but it does reinforce the security cycle play for defence stocks which now benefit from multiple ongoing situations.

_{^{We recommend favouring companies with visible earnings delivery, AI payback, strong balance sheets, and geopolitical resilience, while avoiding names priced for ‘perfection’ in an uncertain rates and oil environment.}}

For another week, Kenyan equities failed to replicate Wall Street’s enthusiasm. The major indices ended lower, extending the downward trend that began in the prior week. The NSE All Share Index closed at 205.34, down 0.85%, while the NSE 20 declined 1.16% to 3,547.53 and the NSE 25 fell 1.17% to 5,667.98. Market capitalisation ended the week at about KSh 3.41 trillion. While global equity markets were willing to price in stronger earnings momentum and improving risk appetite, Kenyan equities remained constrained by domestic macro risks, policy uncertainty, and tighter liquidity conditions.

The macro backdrop has also become less straightforward. The Kenya National Bureau of Statistics reported that the economy grew by 4.6% in 2025, slightly below the 4.7% recorded in 2024, while projecting growth of 4.9% in 2026. At the same time, the inflationary story became less comfortable. April inflation accelerated to 5.6% from 4.4% in March, marking the highest since May 2024, driven by higher food, transport, and energy costs. The Central Bank of Kenya had already paused its easing cycle in April, keeping the Central Bank Rate at 8.75%. Meanwhile, the shilling remained broadly stable around 129.19 per dollar, supported by reserves of $13.23 billion, equivalent 5.6 months of import cover. These reserve are useful but may nit fully insulate Kenya, as Kenya remains an imported energy economy.

The fixed income market is sending a similarly cautious message. The Treasury Bill auction for the week ending April 30 was undersubscribed for a third consecutive week, attracting about KSh 18.5 billion against KSh 24.0 billion on offer, equivalent to a take-up rate of roughly 77%. At the same time, the government has revised higher its domestic borrowing target for the current fiscal year, increasing the risk of heavier supply pressure and stronger competition for domestic liquidity. This matters for equities because higher government borrowing can raise the hurdle rate for equity rerating.

Policy uncertainty is set to add another layer of pressure. The National Treasury, submitted by John Mbadi, submitted the Finance Bill 2026, with reports indicating that the draft seeks to broaden the tax base across imported phones, second had clothing, betting flows, digital payments, and virtual assets.

_{^{We continue recommending cautious on Kenyan equities, favouring companies with strong pricing power and limited exposure to fuel driven cost pressures.}}

_{Last Week’s Review}

Last week’s single name ideas in Meta Platforms (NASDAQ:META), Amazon (NASDAQ:AMZN), and Apple (NASDAQ:AAPL) produced a net return of -2.44% based on a 40% allocation to Meta, 30% to Amazon, and 30% to Apple. Meta was the main drag falling 9.82%, while Amazon and Apple partly offset the decline with gains of 1.62% and 3.35%, respectively. The outcome reflected a more selective market reaction to mega cap technology, with investors rewarding steadier earnings delivery while penalising heavier AI spending where the near term payoff remains less clear. The result unfortunately ends a six week winning streak for our Global Trade ideas of the week, reflecting a more selective market reaction to mega-cap technology.

For the Kenyan trade, the basket was Equity Group, KCB Group, and Absa Bank Kenya produced a net return of -1.19%, based on a 10% allocation to Equity, 45% to KCB, and 45% to Absa. Equity declined 2.00%, and KCB fell 2.19%, with the two being the drags of the week.

_{This Week’s Trade Ideas}

_{- Global Trade}

_{Uber Technologies Inc (NYSE:UBER)}
This week we are going with Uber Technologies, which is reporting earnings this week. The trade is based on the view that a stronger than expected earnings print, combined with constructive management commentary around autonomous vehicles, could support a rally in the stock. If management reinforces the idea that Uber can become the preferred distribution platform for autonomous vehicle operators, investors may begin to place a higher value on Uber’s long term role in the robotaxi ecosystem.

_{- Kenya Trade}

_{Equity Group Holdings (NSE:EQTY), KCB Group (NSE:KCB), Absa Bank Kenya Plc (NSE:ABSA)}
The trade remains the same bank basket, but with adjusted allocations. Equity Group now rises to 40%, while KCB Group and Absa Bank Kenya fall to 30% each. The reasoning is that Kenyan equities continued their decline because of a more uncertain macro environment. These bank continue remaining compelling because of their resilient earnings, strong balance sheets, and their compelling valuations relative to their returns on equity.

Our focus this week centres on three themes.

Progress in the Middle East - Our focus is on whether the latest U.S. effort to guide ships through the Strait of Hormuz improves the flow of a global trade. Recent reports suggest the U.S. will begin helping stranded vessels move through the Strait from Monday, which markets may treat as a constructive development if it leads to more shipping activity and reduces immediate pressure on oil and freight markets. The key question is whether this becomes a stabilising step or another source of geopolitical friction. For risk assets to extend their rally, investors will need evidence that movement through the Strait is improving without triggering a wider escalation.

AI Earnings and Private Credit Commentary - The other area focus is whether earnings can keep supporting investor sentiment, particularly around AI. AMD reports this week with investors likely to focus on data centre demand, AI chip momentum, and whether management can strengthen confidence in its comptetive positioning. Palantir will also be important because its results will give a clear indication on enterprise AI demand. Apollo Global Management is another key report, as it should give commentary around useful insight into private credit conditions.

Kenya’s Fuel Price Impact - The final focus is local investor and consumer sentiment around the proposed tax bill. The central question is whether the market views the measurers as a credible step toward fiscal consolidation or as another pressure point for households, businesses, and corporate earnings.

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