Earnings growth goes global

nov 13, 2017

Key points

  • We like stocks in Europe, Japan and emerging markets (EM) against a backdrop of surging corporate earnings and sustained global growth.
  • The U.S. Treasury yield curve hit its flattest levels in a decade on greater short-term bond supply and solidifying Fed rate increase expectations.
  • We expect data to confirm our view that U.S. core inflation is picking up after a soft patch, keeping the Fed on track to lift rates in December.

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

Company 12-month trailing earnings, U.S. vs. the rest of the world, 2008-2017

Chart: Company 12-month trailing earnings, U.S. vs. the rest of the world, 2008-2017

Sources: BlackRock Investment Institute, with data from Thomson Reuters and IBES, November 2017.
Notes: The lines show trailing 12-month aggregate earnings for the MSCI USA and MSCI ACWI ex USA indexes, rebased to 100 as of January 2008.

Corporate earnings outside the U.S. have snapped back, as the chart above 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.

Finding the profit winners

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.


Nov. 14 China October industrial production, retail sales
Nov. 15 Japan Q3 GDP; U.S. October CPI, retail sales
Nov. 16 UK October retail sales

The October U.S. Consumer Price Index (CPI) is expected to show an increase in the monthly rate of core inflation, likely reassuring Fed policymakers prices are moving back toward its 2% target. Our BlackRock Inflation GPS points to a further recovery in core prices to 2% in coming months. U.S. retail sales for the same month should post a smaller increase after a weather-related boost in September, and should also suggest household spending is in healthy shape heading into the holiday season. The fifth round of NAFTA negotiations starts on Wednesday. Uncertainty over a successful conclusion in early 2018 has been mounting, and we believe market prices currently do not reflect the risk of a failure to reach agreement.

  • The U.S. Treasury yield curve – the spread between two- and 10-year yields – shrank to its flattest levels in a decade as the Treasury boosted supply of short-end paper and expectations firmed for a Fed rate increase in December. We see scope for a historically flatter yield curve, as highlighted in our latest Global macro outlook.
  • Brent oil prices hit two-year highs near $65 a barrel after Saudi Crown Prince Mohammed bin Salman consolidated power in an anti-corruption drive, stirring concerns about greater regional tensions with Iran.
  • U.S. Senate Republicans unveiled their plan for tax reform, which differed in key respects to the House version and suggested a bumpy ride ahead for final passage. The Senate version delays a reduction in corporate taxes to 2019.

Global snapshot

Weekly and 12-month performance of selected assets


EquitiesWeekYTD12 MonthsDiv. Yield
U.S. Large Caps -0.1% 15.3% 19.1% 1.9%
U.S. Small Caps -1.3% 9.9% 19.4% 1.2%
Non-U.S. World -0.2% 23.7% 26.0% 2.9%
Non-U.S. Developed -0.4% 21.7% 24.7% 3.1%
Japan 1.2% 22.5% 23.8% 2.0%
Emerging 0.2% 33.4% 31.8% 2.4%
Asia ex-Japan 0.4% 39.3% 34.4% 2.3%
BondsWeekYTD12 MonthsYield
U.S. Treasuries -0.3% 2.0% 0.8% 2.4%
U.S. TIPS -0.1% 2.0% 0.9% 2.5%
U.S. Investment Grade -0.7% 5.0% 4.5% 3.3%
U.S. High Yield -0.8% 6.6% 9.1% 5.8%
U.S. Municipals 0.2% 5.3% 3.4% 2.2%
Non-U.S. Developed 0.5% 8.1% 2.9% 0.8%
Emerging Market $ Bonds -0.8% 8.3% 7.8% 5.4%
CommoditiesWeekYTD12 MonthsLevel
Brent Crude Oil 2.3% 11.8% 38.6% $63.52
Gold 0.4% 11.1% 1.3% $1,275
Copper -1.6% 22.6% 21.2% $6,786
CurrenciesWeekYTD12 MonthsLevel
Euro/USD 0.5% 10.9% 7.1% 1.17
USD/Yen -0.5% -2.9% 6.3% 113.53
Pound/USD 0.9% 6.9% 5.1% 1.32

Source: Bloomberg. As of Nov. 10, 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.

Asset class views

Views from a U.S. dollar perspective over a three-month horizon

Table: Asset class views from a U.S. dollar perspective

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Richard Turnill
Global Chief Investment Strategist
Richard Turnill, Managing Director, is Global Chief Investment Strategist for BlackRock, leading the Investment Strategy Function within the BlackRock ...
Isabelle Mateos y Lago
Global Macro Strategist, BlackRock Investment Institute
Isabelle Mateos y Lago, Managing Director, is a global macro investment strategist in the Investment Strategy team of the BlackRock Investment Institute. The ...
Kate Moore
Chief Equity Strategist, Americas
Kate Moore, Managing Director, is Chief Equity Strategist – Americas for BlackRock and is a member of the BlackRock Investment Institute. She is responsible for ...
Jeffrey Rosenberg
Chief Fixed Income Strategist
Jeffrey Rosenberg, Managing Director, is BlackRock's Chief Investment Strategist for Fixed Income. His responsibilities include working closely with the Chief ...