For qualified investors

Earnings strength bodes well for stocks

By Richard Turnill

Key points

  1. We see corporate earnings strength, particularly in the US, extending through year-end, as upbeat guidance signals company confidence.
  2. The Turkish lira hit record lows amid rising worries about Turkey’s fragile economy, sending jitters across emerging markets (EM).
  3. Economic data are likely to show Chinese growth holding up, as Beijing loosened financial conditions in the face of rising trade conflicts.

Earnings strength bodes well for stocks

US companies are leading another outstanding earnings season globally. Firms beating expectations have been rewarded with rising stock prices, even as investors fret about rising economic uncertainty, trade frictions and a strong US dollar. Our analysis of corporate guidance suggests company confidence is on the rise – giving us conviction that earnings strength can power on in 2018 amid solid global growth.

Chart of the week

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Company executives in the US have become more upbeat. Almost 80% of the companies in the MSCI USA Index that offer guidance have raised their full-year forecast for earnings, sales or both so far this year, as the chart above shows. This compares with an average of 63% since the global financial crisis ended. The optimism is widespread: More companies across all sectors have revised up their guidance this year than the post-crisis average. Healthcare and information technology, with a combined 40% of the index’s market cap, have traditionally had relatively high upward earnings revisions – and are exceeding this bar in 2018. Consumer sectors have modestly lagged the average rate of upward revisions in the broad index. Some of these companies are citing dollar strength and rising input costs that can be hard to pass on to consumers, our analysis of second-quarter earnings call transcripts shows.

Onward and upward

We see earnings growth being driven by more than one-off stimuli, such as the US tax cuts. A solid global economy – with our BlackRock Growth GPS pointing to room for upward revisions in global growth forecasts – has been supporting high revenue growth. US companies reported 10% annual revenue growth in the second quarter – the strongest in nearly seven years. Sales growth for EM companies is on par with that in the US, our analysis shows, although just one-third have reported so far for the latest quarter. Europe and Japan are relative laggards with 5% revenue growth.

Rising trade conflicts have been front and centre in the markets and the media. So far they have had limited impact on global earnings – or the earnings outlook. There are exceptions: Consumer discretionary firms were among the first to feel the pinch from tariffs. Case in point: Global auto and household appliance makers guided earnings lower after the US slapped tariffs on steel and aluminum imports. Corporate executives in most other sectors are expressing confidence that much of the increased cost can be passed on.

We expect earnings growth, dividends and share buybacks – not multiple expansion (rising price-to-earnings ratios) – to drive equity returns over the coming quarters. We see solid fundamentals underpinning global growth and supporting corporate earnings, though geopolitical risks such as trade conflicts are amplifying economic uncertainty. See our BlackRock geopolitical risk dashboard for our latest assessments. We believe portfolio resilience is critical against this backdrop. We prefer companies with strong balance sheets and solid earnings momentum. We find these primarily in the US. We also like EM equities supported by economic reforms, improving corporate fundamentals and reasonable valuations, but see escalating trade conflicts and a stronger US dollar as potential risks. A currency crisis in Turkey highlights the risks in EM economies dependent on external funding, and argues for a selective approach.


  • The Turkish lira plummeted on heightened economic stress and rising tension with the US Fears around European bank exposure helped the turmoil spread. The specter of more US sanctions on Russia sent Russian assets tumbling.
  • The VIX index, a gauge of equity market volatility, rose to a two-week high as the crash of the lira rocked markets. Volatility in Italy’s bond market picked up ahead of the new government’s budget submission. Market reaction to tit-for-tat tariffs between China and the US and a diplomatic spat between Canada and Saudi Arabia was limited.
  • China’s inflation numbers were higher than expected. Solid US inflation data for July should keep the Federal Reserve on its normalisation path, we believe, even if inflation may have peaked for now.



  Date: Event
Aug 13 The Organization of the Petroleum Exporting Countries (OPEC) monthly oil market report
Aug 14 China retail sales and industrial output; ZEW economic sentiment
Aug 15 US retail sales, industrial production
Aug 17 University of Michigan Surveys of Consumers

This week’s economic data could show economic growth is holding up in China, albeit at relatively subdued levels. Beijing loosened financial conditions after rising trade conflicts and a campaign to rein in credit growth threatened to derail economic growth. July retail sales may be a tad higher than the 15-year low hit in May. Industrial output may have risen moderately from the previous month, consensus estimates suggest. But rising trade conflicts with the US may start to affect the economy. For now, our BlackRock Growth GPS is consistent with our expectation for continued solid growth in china. The state of the economy and trade risks are set to dominate discussions at the annual summer retreat of China’s top leaders.

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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