For qualified investors

An upgrade to US equities

By Richard Turnill

Key points

  1. We have upgraded US equities because of very strong earnings momentum, and consequently are now neutral on European stocks.
  2. Global equity markets recovered some ground after their early February swoon and the VIX declined. US inflation came in higher than expected.
  3. Minutes from the Federal Reserve’s late January meeting could show how the central bank may react to higher-than-consensus US inflation.

An upgrade to US equities

We have upgraded our tactical view of US equities to overweight from neutral. The reason: Impending fiscal stimulus is supercharging US earnings growth expectations. We have shifted our view on European equities to neutral as a result. Earnings momentum is solid in Europe — but lags that of other regions.

Chart of the week
Corporate earnings revision ratios, 2008-2018

Chart of the week

Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in an index.
Sources: BlackRock Investment Institute, with data from Thomson Reuters, February 2018.
Notes: The lines show the number of companies in the MSCI USA, Europe, Japan and Emerging Markets indexes with 12-month forward earnings-per-share (EPS) estimates revised up in the previous month divided by the number of companies with downward revisions to EPS estimates. A ratio above one means there are more upgrades than downgrades; a ratio below one means more downgrades than upgrades.

Our US upgrade boils down to a fundamental story underpinned by earnings growth. An added bonus: US valuations look slightly more attractive after the February stock market swoon. Economic strength was already changing the tone of earnings momentum, but US tax cuts and government spending plans lit a fire under the trend. The chart above illustrates the sharp acceleration in US earnings upgrades as analysts factored in the stimulus. The ratio of upgrades to downgrades for US large caps (the orange line) stands at the highest level since the data series started in 1988. Upward revisions are solid globally, but the US strength is unmatched. Japan is unique, as earnings revisions there tend to be noisy. We see the strong US earnings momentum persisting in the short term and leading to higher returns

Earnings growth eclipses valuations

US earnings growth momentum was already strong before the announced tax cuts and fiscal stimulus, thanks to an improving economy. Earnings growth for S&P 500 firms was 15% year-over-year in the last quarter of 2017, and sales growth was the highest since the third quarter of 2011. Some 60% of the S&P 500 companies providing guidance during fourth quarter earnings season exceeded what analysts had penciled in for 2018. Companies have had an incentive to give conservative forecasts as stocks that disappointed on earnings and sales have been disproportionately punished in recent quarters. US earnings estimates have jumped by more than seven percentage points to 19% growth for 2018, as analysts factored in corporate guidance and the stimulus benefits.

US stocks have already retraced a large part of their early February losses, but we believe the coming positive effects of new US tax and spending plans are still underappreciated by markets. Valuations are certainly still at the top end of their historical range and we see little scope for equity multiples in the US, or most other regions, to expand further. But we find earnings growth matters more than valuations over shorter time horizons at this stage of the bull market. We are in the ninth year of an unusually long economic expansion, and while we believe the cycle has room to run, we see gradually rising rates and modestly higher inflation ahead.

We see earnings-per-share (EPS) growth and dividends fueling returns. Some companies will choose to spend their tax windfalls on buybacks or dividends; others will boost capital spending. The scope for additional M&A activity is also large. The risks? Accelerating inflationary pressures could threaten margins and rising real rates may lead to lower multiples. We see the tax windfall providing an earnings buffer against these forces. We maintain high conviction in equities overall. We see solid European equity returns ahead, but lower earnings growth relative to other regions limits European stocks’ potential to outperform in the short term. Emerging markets remain a favoured region. In the US, we like the momentum and value factors, financials and technology firms.



  • Global equities rallied and the VIX measure of market volatility calmed. The S&P 500 regained nearly 8% from its February intraday low. Japanese stocks lagged the broader rally, as the yen rose to a 15-month high versus the US dollar (USD).
  • US Consumer Price Index (CPI) inflation surprised to the upside on both headline and core measures, pushing US 10-year Treasury yields to a four-year high and above 2.9% for the first time since 2014. US retail sales slowed.
  • Commodity prices rebounded, led by industrial metals and precious metals aided by a weaker US dollar. The International Energy Agency and OPEC again forecasted increased 2018 US oil production. The South African rand rose to a three-year high versus the USD after President Jacob Zuma resigned.




  Date: Event
Feb. 20 Germany ZEW Economic Sentiment Index; eurozone consumer confidence flash
Feb. 21 Fed minutes; eurozone, Germany, US Markit flash PMIs; Japan Nikkei flash Manufacturing PMI
Feb. 22 European Central Bank (ECB) minutes
Feb. 23 Japan CPI

Minutes from the Fed and ECB’s late January monetary policy meetings may provide market surprises. The focus will be on how the Fed characterises US inflation as it nears the central bank’s target. Markets raised their expectations for Fed rate increases last week after US headline and core CPI came in above consensus. Markets now expect just under three Fed hikes this year, more in line with the Fed’s dots, and these expectations could rise further depending on what the minutes show. Surprises in the ECB minutes could come regarding how the central bank characterises the pace of European growth and foreign exchange developments.

Richard Turnill
Managing Director, is Global Chief Investment Strategist for BlackRock
Richard Turnill is Global Chief Investment Strategist for BlackRock. He was previously Chief Investment Strategist for BlackRock’s Fixed Income and active ...

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