Uneven earnings call for granularity
Market take
Weekly video_20241202
Carolina Martinez Arevalo
Portfolio Strategist, BlackRock Investment Institute
Opening frame: What’s driving markets? Market take
Camera frame
Corporate earnings growth has been out of sync outside of the US We believe this divergence means that getting granular with investment views is key.
Title slide: Uneven earnings call for granularity
1: The AI advantage
The US posted 9% earnings growth in the last 12 months compared with just 1% for the rest of the world, according to LSEG Datastream. US stocks have soared on the artificial intelligence theme and resilient economic growth.
Even if forecasts are downgraded over the course of next year, as they tend to be, we expect a brighter earnings outlook globally than in 2024.
The magnificent seven are still expected to drive US earnings due to AI. Yet their lead should narrow as earnings growth broadens to a wider set of beneficiaries.
2: Japan a bright spot
Japan’s broad earnings growth has even outpaced the US over the past year. A sunnier macro picture due to inflation’s return and shareholder-friendly corporate reforms are reasons for optimism.
We think Japan’s solid domestic outlook can keep driving earnings growth even as the yen’s rise from its recent lows can weigh on earnings.
3: Europe still struggling
In Europe, earnings for around half of sectors are still in decline. Yet we favor sectors like financials as banks have outperformed due to higher interest rates, and utilities as one of the few non-US beneficiaries of AI.
Outro: Here’s our Market take
We stay overweight US and Japanese equities as we expect their solid earnings growth to hold up.
In regions with a more challenging outlook, getting granular is key. We see opportunities in sectors such as European financials.
Keying on earnings
We see earnings growth mattering more for equity returns next year over higher valuations. We eye regional earnings themes outside the US and stay selective.
Market backdrop
US stocks hit all-time highs last week, while US bond yields hit one-month lows. European stocks fell on concerns about the fragile French government.
Week ahead
This week, we get US payrolls for November. The recent subdued pace of job gains suggests elevated immigration may be starting to moderate, in our view.
Expectations for solid corporate earnings drove our US and Japanese equity overweights this year. They have delivered, showing that fundamentals are key. Earnings strength could matter more to equity investors in 2025 over valuations. By contrast, European earnings growth remains soft due to stagnant economic activity. We get granular to find opportunities – like in European financials. We see US earnings strength broadening, largely on the artificial intelligence (AI) theme.
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US leads the way
12-month trailing and forward earnings expectations for US versus rest of world
Forward looking estimates may not come to pass. Source: BlackRock Investment Institute, with data from LSEG Datastream, November 2024. Notes: The chart shows 12-month trailing earnings and consensus 12-month forward earnings expectations for the US, both including and excluding “magnificent seven” stocks, and the rest of the world ex-US. The magnificent seven includes Alphabet, Amazon, Apple, Microsoft, Nvidia, Meta Platforms and Tesla.
Coming into 2024, we favored US and Japanese equities because we expected them to deliver the strongest earnings growth. Both delivered. The US has posted 9% earnings growth in the last 12 months compared with just 1% for the rest of the world, LSEG Datastream data shows. See the chart. US stocks have soared on the AI theme and resilient economic growth. The earnings of “magnificent seven” mostly tech companies have surged 45% in the past year. Japanese companies have achieved 14% earnings growth in yen terms on shareholder-friendly corporate reforms plus the return of mild inflation helping drive corporate pricing power. Consensus expectations are for the US to keep leading on earnings even as they are seen improving globally. We think this varied performance shows why this is not a typical business cycle – and why themes like AI and granular views matter more.
Can earnings meet high consensus expectations in 2025? Even if forecasts come down over the course of the year as they tend to, we expect broad-based earnings growth as regions outside the US improve from a low base – but stick with our preferences. In the US, the magnificent seven are still expected to drive earnings on the AI mega force – a big, structural shift. Yet their lead should narrow as easing inflation, resilient consumer spending and the prospect of looser regulation fuels sectors beyond tech. As the AI buildout progresses, it creates investment opportunities – and earnings growth potential – in the utilities, industrials, energy and real estate companies providing key AI inputs. We stay overweight US equities as we think risk-on sentiment can persist thanks to the prospect of corporate tax cuts and deregulation.
Japan's positive outlook
Japan is another bright spot – and its broad earnings growth has even outpaced the US over the past year. A sunnier macro picture due to inflation’s return and shareholder-friendly corporate reforms are reasons for optimism. November’s pickup in core inflation is less of a concern given Japan is still only seeing a return of mild inflation. We think a solid domestic outlook can keep driving earnings even as the yen’s pickup from recent lows can be a drag. Japan’s domestic resurgence could also mitigate the hit from threats like rising US protectionism, in our view. We stay overweight Japanese equities as a result.
In regions with a more challenging outlook, getting granular is key. Europe is still struggling, with Q3 marking just its second straight quarter of earnings growth. Earnings for around half of European sectors are still in decline, LSEG Datastream data shows. Yet we eye selective opportunities like financials, the top performing sector due to higher interest rates. We also like European utilities, one of the few non-US AI beneficiaries. In the UK, we went tactically overweight UK equities earlier this year on attractive valuations and political stability following the Labour Party’s landslide victory in the UK election. Yet that hasn’t spurred the renewed investor interest in the country we expected, while earnings in the UK are outright contracting.
Our bottom line
Earnings are delivering on our overweight to US and Japanese equities where we see solid earnings growth holding up. Even with pockets of weakness elsewhere, getting granular reveals opportunities such as in European banks.
Market backdrop
US stocks rose to record highs in holiday-shortened trading last week. European stocks slipped on concerns about the fragile French government losing a confidence vote. The Mexican peso and Canadian dollar fell against the US dollar on worries about potential tariffs. Markets have been moving closer to our view that sticky inflation could limit Fed rate cuts, reinforced by the US PCE data. US 10-year yields hit a one-month low near 4.20%.
The US payrolls report for November is the key release. We watch for whether job growth rebounds from October’s unexpected drop due to weather-related disruptions. The recent path of job creation still supports our view that the labor market remains strong, fueled by elevated immigration. As immigration falls back, we see employment growth dropping to a slower pace than pre-pandemic – reflecting an aging population, rather than weakness in activity.
Week ahead
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 Nov. 28, 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.
Dec. 2
Euro area unemployment
Dec. 3
US job openings
Dec. 5
US trade data
Dec. 6
US payrolls
Read our past weekly commentaries here.
Big calls
Our highest conviction views on tactical (6-12 month) and strategic (long-term) horizons, December 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 markets | We see opportunities in infrastructure equity due to attractive relative valuations and mega forces. For income, we prefer direct lending given more attractive yields than in public credit. | |
| 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, December 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, December 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.
| 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. China’s fiscal stimulus is not yet enough to address the drags on economic growth, but we think stocks are at attractive valuations to DM shares. We stand 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, December 2024
| 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 has been cutting policy rates 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, December 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.
Meet the authors
Wei Li
Global Chief Investment Strategist – BlackRock Investment Institute
Bruno Rovelli
Chief Investment Strategist for Italy – BlackRock Investment Institute
Roelof Salomons
Chief Investment Strategist for the Netherlands – BlackRock Investment Institute
Carolina Martinez Arevalo
Portfolio Strategist – BlackRock Investment Institute
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