Earnings and the equity outlook beyond the U.S.

We like stocks in Europe, Japan and emerging markets (EM) against a backdrop of surging corporate earnings and sustained global growth. Richard explains.

Upbeat third-quarter earnings and sustained, above-trend global growth underpin our preference for stocks in Europe, Japan and emerging markets (EM). Profit growth is solid, valuations are attractive, and major central banks outside the U.S. remain accommodative

Corporate earnings outside the U.S. have snapped back, as the chart below shows, and are now catching up with those in the U.S. Why did they underperform for so long? Reasons include an overhang of excess capacity, the commodity selloff, the U.S. dollar’s surge and China’s economic slowdown. Now the situation is different, thanks to the most synchronized global expansion in the post-crisis period. The earnings pick-up unfolded in Europe and Japan this year despite the drag of stronger currencies on exporters. Both regions are expected to see earnings growth outpacing that in the U.S. for 2017. We think this trend has more room to run, in part because we see this year’s euro and yen strength slowly reversing.

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We see a brighter outlook for equity performance outside the U.S. over the next few quarters. The global economic expansion is finally filtering through to the bottom lines of companies in Japan, Europe and EM. A bout of euro and yen strength earlier this year raised some doubts about corporate performance, yet ended up doing little to dent improving profitability. Japanese companies increased earnings by 17% in the latest quarter—the best year-on-year increase of any major developed market. The momentum is poised to carry over into 2018. Our view of a modestly higher U.S. dollar further supports the case for non-U.S. equities as export-driven earnings get a further boost from a healthy global trade backdrop.

Tough year-on-year comparisons mean it is hard to see 2018 becoming another year of double-digit global earnings growth. As profit growth peaks, we expect greater dispersion in stock returns—a rising gap between earnings winners and losers. That means investors will need to focus on regions and sectors where profit momentum should have staying power. Tech has been a standout globally in showing it can top high expectations, posting the biggest beats among all sectors across the U.S., Europe and Asia in the latest quarter. Yet cyclicals are in a strong position in this environment, we believe. Financials have made up about 20% of global earnings growth this year—a share we see rising in 2018 as bond yields rise.

Bottom line: We believe non-U.S. stocks, particularly cyclicals, offer rewards given our expectations for sustained, above-trend global growth, relatively attractive valuations and accommodative central banks. We like the momentum and value style factors. Read more market insights in my Weekly Commentary.

Richard Turnill is BlackRock’s global chief investment strategist. He is a regular contributor to The Blog.

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This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of November 2017 and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this post is at the sole discretion of the reader.

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