Global Weekly Commentary | Insights

US earnings strength stands out

Market take

Weekly video_20241021

Carolina Martinez Arevalo

Opening frame: What’s driving markets? Market take

Camera frame

US stocks are hitting new highs as the Q3 corporate earnings season begins.

We think earnings strength in the US will keep broadening beyond tech.

Title slide: US earnings strength stands out

1: Behind our US preference

US stocks have kept outperforming other regions this year even with the sharp pullback in July and August.

Soaring tech valuations and earnings, together with the rest of the market outperforming tech more recently, have driven this outperformance.

In the US, the near-term macro backdrop supports risk-taking even as markets have priced out some Federal Reserve rate cuts.

The Fed is cutting even as growth and the labor market hold strong.

2: Staying positive on Japan

We recently trimmed our Japanese equity overweight due to a stronger yen dragging on earnings – yet we stay positive.

Rapid wage growth, a low unemployment rate and corporate reforms support earnings growth.

3: Getting granular in Europe

We stay underweight euro area stocks given weak growth and a more limited earnings and sales recovery.

Yet we see opportunities in sectors like financials that have kept outperforming – and healthcare as it intersects with mega forces, or structural shifts.

Outro: Here’s our Market take

We stay overweight broad US stocks. We have expanded our preference for artificial intelligence beneficiaries beyond tech.

Outside the US, we are overweight Japanese stocks. We are underweight European equities but get selective by sector.

Closing frame: Read details: blackrock.com/weekly-commentary

Broadening earnings

We think US corporate earnings strength will keep broadening beyond tech in the Q3 season. We also see bright spots in Japan and European sectors.

Market backdrop

US stocks ticked up last week to new record highs, powered by the ongoing rotation into small caps. US 10-year Treasury yields hover near recent peaks.

Week ahead

This week, we eye euro area flash PMIs after the European Central Bank (ECB) cut interest rates for a third time. We think it will step up the pace of rate cuts.

US stocks are hitting new highs – after a summer slump – as Q3 corporate earnings season kicks off. We prefer broad US equities as we expect corporate earnings strength to keep broadening beyond tech. Federal Reserve rate cuts and solid economic activity underpin our US view. We’re overweight Japanese stocks as earnings prove resilient to a stronger yen. Weak growth keeps us underweight European stocks overall, but we have favored sectors like financials.

Market commentary Asset class views

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The earnings divide

Equity sources of total return, year to date

Past performance is not a reliable indicator of future results. It is not possible to invest in an index. Index performance does not account for fees. Source: BlackRock Investment Institute, MSCI, with data from LSEG Datastream, October 2024. Notes: The chart shows the breakdown of each market’s local currency year-to-date return into dividends, earnings growth and valuation. The dots show total year-to-date returns. Earnings growth is based on the year-to-date change in 12-month forward I/B/E/S earnings estimates. Returns are based on MSCI indexes.

Favoring stocks over bonds has been rewarded this year as equities have climbed to new highs. Even as doubts over tech investment in artificial intelligence (AI) and recession fears stoked volatility, US stocks have outperformed other regions this year on earnings growth and soaring tech valuations. See the chart. Jitters about lofty valuations and US election uncertainty can drive market volatility. Yet on a six- to 12-month horizon, we stay overweight US stocks as markets expect double-digit earnings growth over the next year and falling interest rates. We’re overweight Japanese stocks. Strong earnings growth that has boosted stock performance is slowing but remains resilient to a stronger yen. Europe’s story is slightly different: Earnings have been weak given poor economic growth. We’re underweight euro area stocks overall but see bright spots in sectors like financials and healthcare.

We prefer US over European stocks. The reason: The near-term macro backdrop supports risk-taking in the US, even as markets have priced out some rate cuts. The Fed is cutting even as growth and the labor market hold up. We think earnings strength will keep expanding beyond tech, narrowing the gap between tech and other sectors. Earnings for a handful of top companies, mostly tech-related, are expected to grow 19% next year, down from about 30% in 2023 and 2024. Analysts see earnings for the rest of the S&P 500 growing 4% this year and 14% in 2025 after contracting last year, FactSet data show.

Our evolving AI views

We see ample room for the AI theme to run: Its buildout is only in the early stages. Yet investor doubts about tech spending on AI linger. We’ve expanded our AI preference beyond tech to sectors like utilities, energy, real estate and industrials. US utility earnings have grown 8.2% over the past year, the fastest since 2020, based on LSEG data, partly due to AI’s big energy need. Utilities are neck-and-neck with tech as the best-performing sector this year. Our portfolio managers note that industrial companies tied to the AI buildout are seeing more demand than their peers.

Our global stock picks

Outside the US, we stay positive on Japanese stocks after trimming our overweight as a stronger yen drags on earnings. Solid wage growth, stronger corporate pricing power and shareholder-friendly reforms support earnings growth. Elsewhere in Asia, hopes for major fiscal stimulus have halted earnings downgrades for Chinese stocks. We’ve turned overweight Chinese stocks given this policy signal but that doesn’t change the long-term, structural challenges we are concerned about.

We stay underweight euro area stocks given weak growth and a limited recovery. Q3 earnings are expected to grow just 3.7% from a year earlier, with revenues still contracting. Yet we have favored outperforming sectors like financials. We also get granular in healthcare as some businesses will benefit more from AI and other mega forces, or structural shifts. We prefer European healthcare companies over their US peers as they face less risk of losing revenue due to drug patents expiring.

Our bottom line

As Q3 earnings season gets underway, we stay overweight US stocks and expect earnings to strengthen in sectors beyond tech. We’re also overweight Japan’s stocks. We’re underweight European equities but get selective in sectors.

Market backdrop

US stocks ticked up last week to new record highs as Q3 earnings season kicked off. Small-cap stocks led the climb, cruising to their highest level since 2021. Tech stocks rallied to end the week after chipmaker TSMC’s sunny outlook hinted at robust demand for AI chips. US 10-year Treasury yields ebbed to around 4.08%, just off recent highs but still up around 50 basis points in the past month. The ECB cut rates by 25 basis points for the third time this year and signaled a faster pace of cuts.

Global flash PMIs are on tap this week. In the euro area, recent weak PMIs point to contracting business activity. Slowing growth, weaker employment and inflation undershooting projections prompted the ECB to cut policy rates by 25 basis points again last week. Incoming data will be key for an ECB that has vowed to take a meeting-by-meeting approach on future policy decisions. Yet we don’t see the ECB returning to the old regime of very easy monetary policy.

Week ahead

The chart shows that gold is the best performing asset year-to-date among a selected group of assets, while Brent crude is the worst.

Past performance is not a reliable indicator of current or future results. Indexes are unmanaged and do not account for fees. It is not possible to invest directly in an index. Sources: BlackRock Investment Institute, with data from LSEG Datastream as of Oct. 17, 2024. Notes: The two ends of the bars show the lowest and highest returns at any point year to date, and the dots represent current year-to-date returns. Emerging market (EM), high yield and global corporate investment grade (IG) returns are denominated in US dollars, and the rest in local currencies. Indexes or prices used are: spot Brent crude, ICE US Dollar Index (DXY), spot gold, MSCI Emerging Markets Index, MSCI Europe Index, LSEG Datastream 10-year benchmark government bond index (US, Germany and Italy), Bank of America Merrill Lynch Global High Yield Index, J.P. Morgan EMBI Index, Bank of America Merrill Lynch Global Broad Corporate Index and MSCI USA Index.

Oct. 23

Euro area consumer confidence

Oct. 24

Global flash PMIs

Oct. 25

US durable goods; Tokyo CPI

Read our past weekly commentaries here.

Big calls

Our highest conviction views on tactical (6-12 month) and strategic (long-term) horizons, October 2024

	Reasons
Tactical
AI and US equities	We see the AI buildout and adoption creating opportunities across sectors. We get selective, moving toward beneficiaries outside the tech sector. Broad-based earnings growth and a quality tilt make us overweight US stocks overall.
Japanese equities	A brighter outlook for Japan’s economy and corporate reforms are driving improved earnings and shareholder returns. Yet the drag on earnings from a stronger yen and some mixed policy signals from the Bank of Japan are risks.
Income in fixed income	The income cushion bonds provide has increased across the board in a higher rate environment. We like quality income in short-term credit. We’re neutral long-term US Treasuries.
Strategic
Private credit	We think private credit is going to earn lending share as banks retreat – and at attractive returns relative to public credit risk.
Fixed income granularity	We prefer intermediate credit, which offers similar yields with less interest rate risk than long-dated credit. We also like short-term government bonds, and UK long-term bonds.
Equity granularity	We favor emerging over developed markets yet get selective in both. EMs at the cross current of mega forces – like India and Saudi Arabia – offer opportunities. In DM, we like Japan as the return of inflation and corporate reforms brighten our outlook.

Note: Views are from a US dollar perspective, October 2024. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any particular funds, strategy or security.

Tactical granular views

Six to 12-month tactical views on selected assets vs. broad global asset classes by level of conviction, October 2024

Our approach is to first determine asset allocations based on our macro outlook – and what’s in the price. The table below reflects this. It leaves aside the opportunity for alpha, or the potential to generate above-benchmark returns. The new regime is not conducive to static exposures to broad asset classes, in our view, but it is creating more space for alpha. For example, the alpha opportunity in highly efficient DM equities markets historically has been low. That’s no longer the case, we think, thanks to greater volatility, macro uncertainty and dispersion of returns. The new regime puts a premium on insights and skill, in our view.

Search views

Asset		Tactical view	Commentary
Equities
United States			We are overweight given our positive view on the AI theme. Valuations for AI beneficiaries are supported as tech companies keep beating high earnings expectations. We think upbeat sentiment can broaden out. Falling inflation is easing pressure on corporate profit margins.
Europe			We are underweight relative to the US, Japan and the UK – our preferred markets. Valuations are fair. A growth pickup and European Central Bank rate cuts support a modest earnings recovery. Yet political uncertainty could keep investors cautious.
UK			We are overweight. Political stability and a growth pickup could improve investor sentiment, lifting the UK's low valuation relative to other DM stock markets.
Japan			We are overweight. A brighter outlook for Japan’s economy and corporate reforms are driving improved earnings and shareholder returns. Yet the drag on earnings from a stronger yen and some mixed policy signals from the Bank of Japan are risks.
Emerging markets			We are neutral. The growth and earnings outlook is mixed. We see valuations for India and Taiwan looking high.
China			We are modestly overweight. Major fiscal stimulus may be coming and prompt investors to step in given Chinese stocks are at a deep discount to DM shares. Yet we stay ready to pivot. We are cautious long term given China’s structural challenges.
Fixed income
Short US Treasuries			We are underweight. We don’t think the Fed will cut rates as sharply as markets expect. An aging workforce, persistent budget deficits and the impact of structural shifts like geopolitical fragmentation should keep inflation and policy rates higher over the medium term.
Long US Treasuries			We are neutral. Markets are pricing in sharp Fed rate cuts and term premium is close to zero. We think yields will keep swinging in both directions on incoming data. We prefer intermediate maturities less vulnerable to investors demanding greater term premium.
Global inflation-linked bonds			We are neutral. We see higher medium-term inflation, but cooling inflation and growth may matter more near term.
Euro area government bonds			We are neutral. Market pricing reflects policy rates in line with our expectations and 10-year yields are off their highs. Political uncertainty remains a risk to fiscal sustainability.
UK Gilts			We are overweight. Gilt yields offer attractive income, and we think the Bank of England will cut rates more than the market is pricing given a soft economy.
Japan government bonds			We are underweight. Stock returns look more attractive to us. We see some of the least attractive returns in JGBs.
China government bonds			We are neutral. Bonds are supported by looser policy. Yet we find yields more attractive in short-term DM paper.
US agency MBS			We are neutral. We see agency MBS as a high-quality exposure in a diversified bond allocation and prefer it to IG.
Short-term IG credit			We are overweight. Short-term bonds better compensate for interest rate risk. We prefer Europe over the US
Long-term IG credit			We are underweight. Spreads are tight, so we prefer taking risk in equities from a whole portfolio perspective. We prefer Europe over the US
Global high yield			We are neutral. Spreads are tight, but the total income makes it more attractive than IG. We prefer Europe.
Asia credit			We are neutral. We don’t find valuations compelling enough to turn more positive.
Emerging market - hard currency			We are neutral. The asset class has performed well due to its quality, attractive yields and EM central bank rate cuts. We think those rate cuts may soon be paused.
Emerging market - local currency			We are neutral. Yields have fallen closer to US Treasury yields, and EM central banks look to be turning more cautious after cutting policy rates sharply.

Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in an index. The statements on alpha do not consider fees. Note: Views are from a US dollar perspective. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast or guarantee of future results. This information should not be relied upon as investment advice regarding any particular fund, strategy or security.

Euro-denominated tactical granular views

Six to 12-month tactical views on selected assets vs. broad global asset classes by level of conviction, October 2024

Search views

Asset	Tactical view	Commentary
Equities
Europe ex UK		We are underweight relative to the US, Japan and the UK – our preferred markets. Valuations are fair. A growth pickup and European Central Bank rate cuts support a modest earnings recovery. Yet political uncertainty could keep investors cautious.
Germany		We are neutral. Valuations and earnings momentum are supportive relative to peers, especially as global manufacturing activity bottoms out and ECB rate cuts ease financing conditions.
France		We are underweight given modestly supportive valuations. The result of France’s parliamentary election could impact business conditions for French companies. Yet only a small portion of the revenues and operations of major French companies are tied to domestic activity.
Italy		We are underweight. Valuations dynamics are supportive relative to peers, but recent growth and earnings outperformance seems largely due to significant fiscal stimulus in 2022-2023 that cannot be sustained over the next few years.
Spain		We are neutral. Valuations and earnings momentum are supportive relative to other euro area stocks. The utilities sector looks set to benefit from an improving economic backdrop and advances in AI.
Netherlands		We are underweight. The Dutch stock markets' tilt to technology and semiconductors, a key beneficiary of higher demand for AI, is offset by relatively less favorable valuations and a weaker earnings outlook than their European peers.
Switzerland		We are underweight, in line with our broad European view. The earnings outlook has brightened, but valuations remain high versus other European markets. The index’s defensive tilt will likely be less supported as long as global risk appetite holds up, we think.
UK		We are overweight. Political stability and a growth pickup could improve investor sentiment, lifting the UK's low valuation relative to other DM stock markets.
Fixed income
Euro area government bonds		We are neutral. Market pricing reflects policy rates in line with our expectations, and 10-year yields are off their highs. Political uncertainty remains a risk to fiscal sustainability.
German bunds		We are neutral. Market pricing reflects policy rates broadly in line with our expectations, and 10-year yields are off their highs.
French OATs		We are neutral. The EU has already warned France for breaching fiscal rules and had its sovereign credit rating downgraded earlier this year. Elevated political uncertainty, persistent budget deficits and a slower pace of structural reforms remain challenges.
Italian BTPs		We are neutral. The spread over German bunds looks tight given its budget deficits and debt profile, also prompting a warning from the EU. Other domestic factors remain supportive, with growth holding up relative to the rest of the euro area and Italian households showing solid demand to hold BTPs at higher yields.
UK gilts		We are overweight. Gilt yields offer attractive income, and we think the Bank of England will cut rates more than the market is pricing given a soft economy.
Swiss government bonds		We are neutral. The Swiss National Bank cut policy rates twice this year amid reduced inflationary pressure. But it is unlikely to cut rates much further from here.
European inflation-linked bonds		We are neutral. We see higher medium-term inflation, but cooling inflation may matter more near term. Short-term breakeven inflation rates fell further after recent inflation data, making euro area inflation-linked bonds less attractive.
European investment grade credit		We are neutral European investment grade credit, with a preference for short- to medium-term paper for quality income. We maintain our regional preference for European investment grade over the US given spreads are not as tight.
European high yield		We are overweight. We find the income potential attractive. We still prefer European high yield given its more appealing valuations, higher quality and lower duration than in the US Spreads compensate for risks of a potential pick-up in defaults, in our view.

Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in an index. Note: Views are from a euro perspective, October 2024. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast or guarantee of future results. This information should not be relied upon as investment advice regarding any particular fund, strategy or security.

Wei Li

Global Chief Investment Strategist – BlackRock Investment Institute

Carrie King

Chief Investment Officer of US and Developed Markets, Fundamental Equities – BlackRock

Carolina Martinez Arevalo

Portfolio Strategist – BlackRock Investment Institute

Michel Dilmanian

Portfolio Strategist – BlackRock Investment Institute

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Weekly market commentary

US earnings strength stands out

The earnings divide

Our evolving AI views

Our global stock picks

Our bottom line

Market backdrop

Week ahead

Big calls

Tactical granular views

Euro-denominated tactical granular views

Explore more