For months, equity and bond markets have been sending different signals. Bond yields have seen wild swings as a result of a tug of war between those investors who think yields should be higher to compensate for rising inflation, and those who think they should stay low because of aggressive central bank buying. With these tensions in the background since the start of the year, the global benchmark US 10-year Treasury yield quickly rose from less than 1 per cent to above 1.7 per cent in March. But since then, yields have again dropped back , with the US 10-year yield recently struggling to get above 1.3 per cent. Naturally, the slide in bond yields has also led to speculation that bond markets are predicting a more dour economic outlook. These dynamics are not confined to the United States: bond yields in Europe have also fallen back in recent months, and Chinese government bond yields last month dropped below 3 per cent for the first time in a year. To be sure, there has been a weaker tone to the flow of recent macroeconomic data. For instance, China’s set of July activity data showed a surprising degree of broad-based weakness. This probably reflected additional issues last month, including heavy rain and floods in parts of China as well as a Delta-led Covid-19 resurgence , but also the delayed impact of earlier policy tightening. While less dramatic than in China, recent US macro data has also dipped, particularly with regard to household consumption, suggesting the Delta variant is having an impact on the US economy. But while investors would be remiss to entirely disregard these signals, bond markets are likely to be exaggerating the economic headwinds. This is probably mostly due to a supply-demand mismatch in bond markets, with central banks buying bonds nearly as fast as governments can issue them, as well as increased structural demand due to regulation and other factors. Meanwhile, despite the occasional small wobble, signals from global equity markets remain positive. Developed-market indices continue to rewrite all-time highs, driven by surging corporate profits, while valuations are actually slowly deflating. Stock market bears, of course, are quick to point out that share prices have recovered much more sharply than after previous crises, but continued strength in corporate profit is likely to drive them a good bit higher still. Taking the US market as an example, given that listed company profits during the second quarter had roughly doubled from their – admittedly Covid-19 depressed – levels a year earlier, it should not look too crazy to market observers that US share prices have also roughly doubled from their 2020 lows. Crucially, the strength of corporate earnings is still not fully reflected in either analyst forecasts or investor expectations, and it is the process of adjusting too-conservative expectations upwards that should be a key driver of higher share prices from here. Investing in China tech based on state media reports is like reading tea leaves Let’s look at the evidence: for the past five quarters across developed markets, companies have consistently reported profits that exceeded analyst forecasts by 15-20 per cent. Pre-Covid-19, positive surprises of more than 5 per cent were considered very strong. In other words, all through the economic recovery, analysts have underestimated companies’ earnings power to an unprecedented degree. This looks likely to continue for a while yet as, even today, profit forecasts look too conservative compared to likely economic outcomes. Admittedly, growth rates are peaking – profits, after all, are unlikely to grow another 100 per cent over the coming year – but growth should remain strong by historical standards, spurred by pent-up demand and strong policy stimulus. Why profit forecasts should be so consistently wrong is debatable, but one likely key reason is that both the pandemic and the huge policy response are outside anyone’s range of experience. Regionally, the greatest potential for positive surprises in profit growth is likely to be in developed markets, especially in strongly cyclical and old-economy heavy markets such as Japan and Europe. Europe’s decade-long earnings underperformance relative to the rest of the world also suggests potential for a longer-term catch up. Conversely, the situation looks less promising across emerging-market equities, which are unlikely to be able to keep up until macro and growth momentum turns around, particularly in China , and it remains unclear when this may happen. Clearly, near-term market moves and the tone of economic data will, to some degree, remain “Delta dependent” until we have more clarity on the precise impact of the Covid-19 variant. However, throughout all the noise, the clearest signal is likely to continue to come from corporate earnings, telling us to stay positive on the outlook for equities. Patrik Schowitz is a global multi-asset strategist at JP Morgan Asset Management