Richard Turnill
Global Chief Investment Strategist, BlackRock Investment Institute
Richard Turnill is Global Chief Investment Strategist for BlackRock. He was previously Chief Investment Strategist for BlackRock’s Fixed Income and active ...
Key points
- Equity investors have greeted positive earnings with tepid enthusiasm. Yet we see solid fundamentals and returns in the second half.
- Tensions rose between the U.S. and North Korea. Stocks fell, and perceived safe-haven assets rallied.
- We see U.S. and eurozone central bank meeting minutes shedding little light on policy, with the focus on a central banker gathering in late August.
Equity markets have greeted positive earnings reports largely with indifference. Investor sentiment shows more signs of fatigue than euphoria, even as stock markets have repeatedly reached new highs this year. Yet we see solid fundamentals and returns in the second half, with the latter largely tracking earnings growth.
Relative performance one day after earnings release
Sources: BlackRock Investment Institute, with data from Bloomberg, August 2017.
Notes: The bars represent the average performance of all reporting stocks versus their respective benchmark one day after reporting second-quarter or first-half earnings. The indexes used are the S&P 500 Index for the U.S., the STOXX Europe 600 Index for Europe, the Tokyo Stock Exchange Price Index for Japan, and the MSCI Emerging Markets Index for emerging markets. Results are divided into three categories based on whether the companies beat or missed earnings-per-share (EPS) and sales expectations.
Companies that beat on both earnings-per-share (EPS) and sales expectations were met with muted price responses this quarter, as the chart shows. The S&P 500 companies beating on EPS and sales have on average traded flat compared to the benchmark on the day after earnings release, versus nearly 1% outperformance last quarter. Meanwhile, companies that have missed on both earnings and sales were hit particularly hard, especially in Europe.
A high bar for the second half
Investors may be on to something: It will be more difficult for companies to achieve the same EPS growth in the second half, as the earnings recovery in the second half of 2016 is a higher hurdle. The energy sector’s strong contribution to earnings is waning, after its earnings rebound has delivered nearly a quarter of the EPS growth in the U.S. market and half of that in Europe in the second quarter. A stronger euro could slow the pace of earnings growth among European companies. The earnings revisions ratio – the ratio of earnings estimate upgrades to downgrades – in Europe has in fact fallen to a one-year low.
A bull market stretching eight years – and nearly weekly new highs – seem to be weighing on investor enthusiasm. That said, this earnings season has affirmed our positive view on equity fundamentals. Second-quarter sales grew nearly 6% on the year in the U.S. – the second highest growth in five years. We expect technology and financials to lead earnings growth in the second half. And the steady and sustained global economic expansion provides a favorable backdrop for risk-taking.
Bottom line: We expect fundamentals to stay positive in the second half, and see returns generally keeping pace with earnings growth. Cautious investor sentiment should keep valuation multiples in check, particularly in the U.S., we believe. We see opportunities in emerging market equities, as economic reforms, improving corporate fundamentals and reasonable valuations provide support.
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| Date: |  |
Event | |
| Aug. 14 | Japan second-quarter gross domestic product (GDP); eurozone and China industrial production (IP) | ||
| Aug. 15 | Germany Q2 GDP; U.S. retail sales | ||
| Aug. 16 | Eurozone Q2 GDP; Federal Open Market Committee minutes; North American Free Trade Agreement (NAFTA) renegotiations start | ||
| Aug. 17 | European Central Bank (ECB) monetary policy account; U.S. IP |
The Federal Reserve minutes and ECB account are unlikely to shed much light on their next policy moves, with greater focus on an annual gathering of central bankers in Jackson Hole in late August. U.S. retail sales are expected to rebound from a two-month drop.
- Tensions between the U.S. and North Korea flared up. Global stocks fell. Perceived safe havens such as the yen, the Swiss franc, gold and government bonds rallied. VIX futures trading volume hit a record high.
- U.S. inflation showed signs of stabilization despite missing estimates, against the backdrop of a buoyant labor market. China’s consumer prices undershot expectations, but factory inflation held steady.
- The National Federation of Independent Business (NFIB) said small business sentiment rose for the first time since January, and lack of quality workers is a common concern. The U.S. Job Openings and Labor Turnover Survey (JOLTS) reported a record level of job openings in June.
Global snapshot
Weekly and 12-month performance of selected assets
| Equities | Week | YTD | 12 Months | Div. Yield |
|---|---|---|---|---|
| U.S. Large Caps | -1.4% | 9.0% | 11.7% | 2.0% |
| U.S. Small Caps | -2.7% | 2.0% | 13.4% | 1.3% |
| Non-U.S. World | -1.7% | 16.8% | 15.3% | 3.1% |
| Non-U.S. Developed | -1.5% | 16.1% | 15.2% | 3.3% |
| Japan | 0.6% | 13.2% | 14.2% | 2.2% |
| Emerging | -2.2% | 22.8% | 17.5% | 2.6% |
| Asia ex-Japan | -2.6% | 26.2% | 20.3% | 2.4% |
| Bonds | Week | YTD | 12 Months | Yield |
|---|---|---|---|---|
| U.S. Treasuries | 0.5% | 2.7% | -1.2% | 2.2% |
| U.S. TIPS | 0.6% | 2.1% | 0.4% | 2.1% |
| U.S. Investment Grade | -0.1% | 4.6% | 2.0% | 3.1% |
| U.S. High Yield | -0.8% | 5.3% | 8.9% | 5.8% |
| U.S. Municipals | 0.3% | 4.9% | 0.8% | 2.1% |
| Non-U.S. Developed | 0.8% | 9.7% | -1.8% | 0.8% |
| Emerging Market $ Bonds | -0.2% | 7.4% | 4.0% | 5.3% |
| Commodities | Week | YTD | 12 Months | Level |
|---|---|---|---|---|
| Brent Crude Oil | -0.6% | -8.3% | 13.2% | $52.10 |
| Gold | 2.4% | 12.4% | -3.7% | $1,289 |
| Copper | 0.6% | 15.8% | 32.2% | $6,411 |
| Currencies | Week | YTD | 12 Months | Level |
|---|---|---|---|---|
| Euro/USD | 0.4% | 12.4% | 6.1% | 1.18 |
| USD/Yen | -1.4% | -6.6% | 7.1% | 109.19 |
| Pound/USD | -0.2% | 5.5% | 0.4% | 1.30 |
Source: Bloomberg. As of August 11, 2017.
Notes: Weekly data through Friday. Equity and bond performance are measured in total index returns in U.S. dollars. U.S. large caps are represented by the S&P 500 Index; U.S. small caps are represented by the Russell 2000 Index; Non-U.S. world equity by the MSCI ACWI ex U.S.; non-U.S. developed equity by the MSCI EAFE Index; Japan, Emerging and Asia ex-Japan by their respective MSCI Indexes; U.S. Treasuries by the Bloomberg Barclays U.S. Treasury Index; U.S. TIPS by the U.S. Treasury Inflation Notes Total Return Index; U.S. investment grade by the Bloomberg Barclays U.S. Corporate Index; U.S. high yield by the Bloomberg Barclays U.S. Corporate High Yield 2% Issuer Capped Index; U.S. municipals by the Bloomberg Barclays Municipal Bond Index; non-U.S. developed bonds by the Bloomberg Barclays Global Aggregate ex USD; and emerging market $ bonds by the JP Morgan EMBI Global Diversified Index. Brent crude oil prices are in U.S. dollars per barrel, gold prices are in U.S. dollar per troy ounce and copper prices are in U.S. dollar per metric ton. The Euro/USD level is represented by U.S. dollar per euro, USD/JPY by yen per U.S. dollar and Pound/USD by U.S. dollar per pound. Index performance is shown for illustrative purposes only. It is not possible to invest directly in an index. Past performance is not indicative of future results.
