Episode Description:
After two years of full steam ahead for U.S. equity markets, 2025 has so far featured a number of speed bumps and even a few U-turns for some key areas of the market. With continued market volatility and a stock market correction, how should investors be thinking about the U.S. equity market as compared with the rest of the world?
Carrie King, U.S. and Developed Markets Chief Investment Officer for BlackRock’s Fundamental Equities group will discuss market volatility, rotations and the state of the U.S. equity market.
Sources: Q2 Equities Outlook, BlackRock 2025
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Tags: equity markets, us equities, stock market, stocks, value stocks, growth stocks, investing opportunities
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Oscar Pulido: After two years of full steam ahead for us, equity markets 2025 has so far featured a number of speed bumps and even a few U-turns for some key areas of the market. With continued market volatility and a stock market correction, how should investors be thinking about the US equity market as compared with the rest of the world?
Carrie King: Tariff threats certainly rattled investors, arousing fears of higher inflation, slower growth, or worse yet both high inflation and growth at the same time- stagflation. The earnings outlook for the U.S. is still excellent. Volatility is uncomfortable, but we, as fundamental, bottom-up stock pickers, actually welcome that fertile hunting ground for stock picking.
Oscar Pulido: Welcome to The Bid where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm your host, Oscar Pulido. Today we welcome back Carrie King, U.S. and Developed Markets Chief Investment Officer for BlackRock's Fundamental Equities Group. Together Carrie and I will take a tour of the equity landscape, we'll discuss market volatility rotations, and the state of the US equity market.
Carrie, thank you for joining us on The Bid.
Carrie King: Thank you for having me. It's nice to be here.
Oscar Pulido: And welcome back. It's been about a year since, we had you on, and I was thinking back to that conversation we talked about opportunities beyond AI. And a year ago I remember thinking, that seems like a pretty controversial view to talk about investment opportunities beyond AI. But maybe you were onto something. In fact, it does seem like you were onto something because we have seen a broadening out of the market, the equity markets and many other sectors participating in the rise, beyond ai. So, it turns out you were, pretty prescient. Talk us through what's happened since we last spoke, and where are we now?
Carrie King: So as a reminder, let's just take a little visit to history. In 2023 and 2024, we had back-to-back years of 25% returns in the equity markets in the U.S., which is pretty unusual. It was a 57% return over that two-year period. Now, here's the interesting thing, which we talked about last time, an entire two thirds of that massive return, in the S&P 500 was attributable to a small cohort of large tech companies, which people frequently refer to as the Magnificent Seven -or the Mag seven.
So massive outperformance by those companies. And what do those companies have in common? They have dominant market shares, they have extremely high cash flows, they're all at the crossroads of internet and AI. So, ample opportunity to reinvest those high cash flows and generate outsized returns on those investments. And that is a lethal combination that we saw driving the equity markets in '23 and 2024.
So, what's happened since then? Yes, we've had a broadening, in a couple different dimensions. We've had a broadening within US equities, and we've had a broadening away from US equities. So, in the US right now, the S&P 500 is about flattish, but if you eliminate the Mag Seven, the market's actually up and those companies as a cohort are down. Apple and Google, for example, are down mid-teens and you mentioned, sector rotations into other areas. Utilities, for example, are an area that's leading the market this year. So, big handoff within the US markets.
Now, let's look at US versus rest of the world. Similar handoff. After the Global Financial Crisis, equities outpaced the rest of the world. They dominated equities in the U.S. US equities outperformed Europe by about two X, they outperformed EM by about four X. China was barely up. This year China's up almost 20%. Europe is up double digits. and again, the US is about flat today. So, another big handoff that's unusual compared to history.
Oscar Pulido: You've said there's been a rotation within US equities and also away from US equities or referring to, performance outside the us So what's driven this rotation, and do you think it's going to continue?
Carrie King: Sure. so along with this rotation, there's been a lot of volatility, and I would say there are two key things in my view that have driven the volatility and that have driven the rotation and the broadening. US government policy, I think, has driven most of the volatility. and in terms of the broadening, I think the driver for that has been more company fundamentals. So, let's take a look at those two things.
In terms of policy driving volatility, Trump's tariff threats, certainly rattled investors, arousing fears of higher inflation, slower growth, or worse yet both high inflation and growth at the same time- stagflation. So, the markets don't like uncertainty. We saw a lot of volatility around that period. I think now we're past max volatility, with a lot of the negotiations that we're hearing coming out of the administration. but I would like to just add that volatility is uncomfortable, but we as fundamental, bottom-up stock pickers actually welcome that fertile hunting ground for stock picking. It gives us an opportunity to take all of the conviction that we build, around companies through our bottom-up deep, fundamental analysis and allows us to deploy those convictions into our portfolios.
And then in terms of, the rotation and the broadening, I think company fundamentals are more responsible for that. First of all, at the beginning of this year, you may remember, out of seemingly left field came a company called DeepSeek, out of China. it was China's AI play, which was seemingly as competitive as the US behemoths at a fraction of the cost. So, this fundamental development led investors to question the dominance of the U.S., mega Cap AI leaders. So not only their dominance in the marketplace, but what kind of return could these companies earn on this, a hundred billion dollars investment when Deep Seek seemingly doing the same thing at a fraction of the cost. So that was one fundamental shift that causes broadening away from the mega cap tech companies.
And the second is a deceleration in the earnings power of the Mag Seven as a group. So, in '23 and 2024, that cohort of companies had earnings growth north of 30%, while the other ‘493’, as we call it, the rest of the S&P 500, had about flat earnings taken collectively. this year we're going to see still strong earnings from mega cap tech, but a deceleration. And at the same time, we'll see an acceleration from the other 4 93, so that. Earnings growth gap is starting to narrow, and investors have taken notice, and I think that has also driven some of this broadening.
And then finally, just in terms of, U.S. to Europe or US to other parts of the globe, similar story. the earnings growth gap between the US and Europe is about mid-single digits. and next year that earnings growth gap will be narrowing because growth in Europe will be accelerating much faster than the growth rate in the U.S. Couple that with low valuations in Europe and that drove a rotation from US and into Europe.
Oscar Pulido: I'm having some déja vu, especially when you talked about the earnings growth in the Mag Seven, versus the rest of the market. Because I think you said that last year, that part of what was driving your view that we would see a broadening in the market was this narrowing in the earnings growth, meaning that the Mag Seven and the rest of the market, we're starting to look more comparable from an earnings growth perspective. And we spoke to your colleague, Tony Despirito recently, who reminded us that earnings are ultimately the biggest driver of equity markets. You also just touched on Europe, and the growth that you're seeing in the region, the outperformance that you're seeing of those markets, what's driving the growth in the region and therefore the outperformance relative to the U.S.?
Carrie King: Sure, so, a couple of things to note. Number one, President Trump, and his cabinet members have made it clear that NATO countries need to increase their own defense spending. They need to take on more of that burden themselves. And so, there's an expectation that Europe will start investing more in its industrial complex as a result of that narrative coming out of the U.S. And in fact, the most specific, and real example we've seen of that is Germany recently eliminated its, debt break and will be spending close to a trillion dollars, on its infrastructure. And you can see that in the European markets when you look at the European defense companies specifically, they've been some of the biggest market leaders.
Number two, if you look at policy in Europe relative to the U.S., the ECB is cutting rates, providing more stimulus for spending and economic growth. While, in the US we're on pause. So, where we've seen that manifest itself is in the tremendous, rebound in what were very inexpensive European financial stocks, which are up anywhere from 40 to 70% this year helping to drive the European returns. And all of this took place in an environment when coming into the year, European stocks were at very attractive valuations. Coming into this year, US stocks were trading at about 22 times earnings. Europe was trading about 13 times earnings. That valuation gap was about the highest it's ever been. Add to that, that earnings revisions for Europe were positive, earnings revisions for the US were negative. and that was a perfect recipe for outperformance in Europe versus the U.S. And those are some of the key earnings drivers.
Oscar Pulido: And ‘earnings revisions’ means the expectations of whether earnings are more likely to go up or down?
Carrie King: Yes. it's the current, estimated earnings growth of the region and we track that over time. So, investors in the US, for example earlier this year, were looking for 14% earnings growth in the U.S. That earnings growth expectation today is about eight or 9%, and the opposite, would've taken place in Europe. Although I will say we have started to see some negative revisions in Europe, more recently.
Oscar Pulido: So, earnings are still growing in the US but perhaps people's expectations were coming down a bit in Europe, they've been going up a bit and that's maybe what's been driving some of the difference in performance in these equity markets.
Carrie King: Exactly.
Oscar Pulido: Just to come back to this theme of US stocks, which have had a long period of outperformance post the financial crisis. and there was a term that the BlackRock Investment Institute, I think has used to refer to this, theme of 'US exceptionalism'. The fact that US stocks have been so dominant in terms of performance from a market cap perspective, they are, quite a large part of global indices. Talk a little bit more about what's powered this theme of US exceptionalism and where does it stand now?
Carrie King: Sure. Absolutely. and it's interesting, I love the question. It's one I myself pose to our, a global investment platform that we have, and interestingly, two thirds of the respondents of BlackRock investors believe that US equities and the magnificent Seven companies will continue to outperform over a longer, it was a three year time period as I pose the question, but what's driven this as you, say we, some of us call it, 'US excellence or American exceptionalism.' US companies in general compared to the rest of the world, operate in a very favorable regulatory environment. They have significant flexibility. if you just think about the Covid period where a lot of the large internet centric companies staffed up when the whole world moved to the internet during Covid.
And then when the economy normalized, those companies all had massive lay-offs and they did it with the flip of a switch. I think that's something that you can't, companies don't have the ability to do in other regions around the world. favorable regulatory environment, significant flexibility- these bring a culture of innovation, that I think is unique in the United States, which then engenders a larger amount of free cash flow thrown off from operations for companies in the US versus the rest of the world. it's this prosperous flywheel, those free cash flows are then reinvested back into the business more in the US than you see reinvestment outside the US and then they're earning a higher return than is available outside the U.S. So, it's this flywheel effect that's created these dominant companies with excellence and innovation and financial health.
Oscar Pulido: And so, U.S. companies are healthy, earnings are growing free, cash flows are strong, but we are starting to see outperformance in, regions outside the U.S. So, where's your conviction level? Is it still towards U.S. equities, but maybe not as high as it was a year ago, or is it increasingly outside the us? How should we think about your viewpoint there?
Carrie King: I think if I look at the long term, the earnings outlook for the U.S. is still excellent. we had a little bit of an adjustment period, multiples maybe got mismatched, but generally speaking the earnings outlook is very good, for the U.S. The way that I build that opinion is, I look at the health of corporations and I look at the health of the consumer of what these corporations are producing.
So, let's look at US corporations. They have among the highest quality characteristics in the world. So, if you look at the balance sheet quality or the balance sheet health of US companies, they are the highest quality they've been in 10 years. And we use a measure looking at, debt to free cash flow is at the healthiest level it's been in 10 years it's not only the best in 10 years, it's extremely healthy levels. We look at the margins, the EBIT margin of companies in the US is at all-time highs.
Oscar Pulido: You mentioned EBIT margin. I think that's just a measure of profitability, is that right?
Carrie King: That's right. It's a company's revenues, minus its expenses. We just docked another quarter Q1 of this year with another, notch up in, EBIT margins.
And then again, looking at the returns on invested capital, which I touched on a little bit. The average return on invested capital for a US company is about 11%. What does that mean? Anything to anybody? Let me put it into context. the average return on invested capital for an international company is about 6%, so almost half. The average return on invested capital for a Mag Seven company is 50%. The numbers are just staggering, in what US companies have been able to produce. So that's US corporations- very healthy.
Let's look at the consumer. The consumer in the U.S. is very resilient and accounts for about 30% of global spending. The consumer in the U.S., she has a rock-solid balance sheet with about 19 trillion of liabilities. Okay, that sounds like a huge number. What does $19 trillion mean? Let's put that into context against that $19 trillion of liabilities, the US consumer has $180 trillion of assets. So, 10 times the asset base of the liability base. That is a very healthy position. And the US consumer, you'll hear people talk about inflation, it's above the Fed target. Even in this higher inflationary environment, the US consumer is experiencing real wage growth. The corporations are in great shape, the consumer is in great shape and a lot of people are making noise about what you pointed out, negative revisions to earnings.
So, let's put that into context. What does that actually mean? Revisions coming into the year every year for the S&P 500 are negative. It's not just this year and this year's revisions are about in line with the historic average. and then what else happens, typically every year is companies go on to beat earnings expectation, which again, we just saw happen in Q1. And how bad are those revisions? Let's look under the hood. They're mostly coming from the energy sector, which saw this year a 30% decline in the oil price, as people started to worry about recession with the tariffs. but we're seeing massive upward revisions in other areas like communication services. So, I think all in all, everything is really set up for continued, I don't want to say dominance, but continued healthy returns in the U.S.
Oscar Pulido: Carrie, you've been an investor for more than three decades. You have a lot of experience and you've been through a lot of market cycles. So, what's your message to investors? Should they be more hopeful, in the future as to what equity markets have in store or more fearful? What does the path ahead look like?
Carrie King: I'm always hopeful. It's my nature. We live in an economy that's upward trending, so it's a good starting point. We've experienced a lot of volatility, which is very uncomfortable for people. It's one of the most despised things I think by, by investors, is volatility and uncertainty. I would say get comfortable with the uncomfortable. This is when the opportunities are the most fertile. Eliminate the noise. Focus on what you know, not on your emotion, and it's the time to put your conviction to work in your portfolios.
Oscar Pulido: You and Tony DiSpirito must share an office or at least a wall because, he said something similar when we spoke to him, which is volatility creates opportunity. It's actually when, the investment opportunities present themselves and you've reiterated that. Carrie, it was great to have you back and to hear your viewpoints and to remember what you told us last year, and in fact, a lot of those things played out. We hope to have you back soon. Thanks for joining us on The Bid.
Carrie King: Thank you for having me.
Oscar Pulido: Thanks for listening to this episode of The Bid. If you've enjoyed this episode, leave a review and share with a friend. And if you want to keep up with what's happening in the economy and the latest market trends, make sure to subscribe to the bid wherever you get your podcasts.
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