MARKET INSIGHTS

Weekly market commentary

Dec 02, 2024

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 U.S. 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 U.S. posted 9% earnings growth in the last 12 months compared with just 1% for the rest of the world, according to LSEG Datastream. U.S. 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 U.S. 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 U.S. 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-U.S. beneficiaries of AI.

Outro: Here’s our Market take

We stay overweight U.S. 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 U.S. and stay selective.

Market backdrop

U.S. stocks hit all-time highs last week, while U.S. bond yields hit one-month lows. European stocks fell on concerns about the fragile French government.

Week ahead

This week, we get U.S. 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 U.S. 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 U.S. earnings strength broadening, largely on the artificial intelligence (AI) theme.

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Market commentary Asset class views
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U.S. leads the way
12-month trailing and forward earnings expectations for U.S. versus rest of world

The chart shows U.S. corporate earnings growth outpacing the rest of the world, driven by the magnificent seven. Consensus estimates show the U.S. leading by a smaller margin in 2025.

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 U.S., both including and excluding “magnificent seven” stocks, and the rest of the world ex-U.S. The magnificent seven includes Alphabet, Amazon, Apple, Microsoft, Nvidia, Meta Platforms and Tesla.

Coming into 2024, we favored U.S. and Japanese equities because we expected them to deliver the strongest earnings growth. Both delivered. The U.S. 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. U.S. 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 U.S. 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 U.S. improve from a low base – but stick with our preferences. In the U.S., 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 U.S. 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 U.S. 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 U.S. 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-U.S. 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 U.S. 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

U.S. 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 U.S. 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 U.S. PCE data. U.S. 10-year yields hit a one-month low near 4.20%.

The U.S. 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

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 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 U.S. dollars, and the rest in local currencies. Indexes or prices used are: spot Brent crude, ICE U.S. Dollar Index (DXY), spot gold, MSCI Emerging Markets Index, MSCI Europe Index, LSEG Datastream 10-year benchmark government bond index (U.S., 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

U.S. job openings

Dec. 5

U.S. trade data

Dec. 6

U.S. payrolls

Read our past weekly market commentaries here.

Big calls

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

  Reasons
Tactical  
AI and U.S. 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 U.S. 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 U.S. 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 U.S. 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

Legend Granular

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   United States: tactical Overweight +1 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   Europe: tactical Underweight -1 We are underweight relative to the U.S., 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.
U.K.   U.K.: tactical Overweight +1 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   Japan: Overweight 1 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   Emerging markets: tactical Neutral We are neutral. The growth and earnings outlook is mixed. We see valuations for India and Taiwan looking high.
China   China: Overweight+1 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 U.S. Treasuries   Short U.S. Treasuries: tactical underweight -1 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 U.S. Treasuries   Long U.S. Treasuries: Neutral 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   Global inflation -linked bonds : Neutral We are neutral. We see higher medium-term inflation, but cooling inflation and growth may matter more near term.
Euro area government bonds   European bonds: tactical Neutral 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   U.K. gilts: tactical Overweight+1 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   Japan government bonds: tactical Underweight -2 We are underweight. Stock returns look more attractive to us. We see some of the least attractive returns in JGBs.
China government bonds   China government bonds: tactical Neutral We are neutral. Bonds are supported by looser policy. Yet we find yields more attractive in short-term DM paper.
U.S. agency MBS   U.S. agency MBS: tactical neutral 01 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   Short-term IG credit: tactical Overweight +1 We are overweight. Short-term bonds better compensate for interest rate risk. We prefer Europe over the U.S.
Long-term IG credit   Long-term IG credit: tactical Underweight -1 We are underweight. Spreads are tight, so we prefer taking risk in equities from a whole portfolio perspective. We prefer Europe over the U.S.
Global high yield   Global high yield: tactical Neutral We are neutral. Spreads are tight, but the total income makes it more attractive than IG. We prefer Europe.
Asia credit   Asia credit: tactical Neutral We are neutral. We don’t find valuations compelling enough to turn more positive.
Emerging market - hard currency   Emerging market-hard currency: tactical Neutral 00 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   Emerging market-local currency: tactical neutral We are neutral. Yields have fallen closer to U.S. 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 U.S. 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

Legend Granular

Asset Tactical view Commentary
Equities    
 Europe ex UK Europe ex-UK: tactical Underweight -1 We are underweight relative to the U.S., 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 Germany: tactical neutral0-1 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 France: tactical Underweight -1 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 Italy: tactical Underweight -1 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 Spain: tactical neutral0-1 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 Netherlands: tactical Underweight -1 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 Switzerland: tactical Underweight 11 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 UK: tactical neutral 00 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 Euro area government bonds: tactical neutral 00 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 German bunds: tactical neutral 00 We are neutral. Market pricing reflects policy rates broadly in line with our expectations, and 10-year yields are off their highs.
French OATs French OATs: tactical neutral 00 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 Italian BTPs: tactical Neutral 0 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 UK gilts: tactical overweight+1 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 Swiss government bonds: tactical neutral 00 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 Euro area inflation-lined bonds: tactical neutral0-1 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 European investment grade credit: tactical Neutral 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 U.S. given spreads are not as tight.
European high yield European high yield: tactical Overweight +1 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 U.S. 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.

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Meet the authors
Wei Li
Wei Li
Global Chief Investment Strategist – BlackRock Investment Institute
Bruno Rovelli
Bruno Rovelli
Chief Investment Strategist for Italy – BlackRock Investment Institute
Roelof Salomons
Roelof Salomons
Chief Investment Strategist for the Netherlands – BlackRock Investment Institute
Carolina Martinez Arevalo
Carolina Martinez Arevalo
Portfolio Strategist – BlackRock Investment Institute

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