BlackRock this week shifted its view on U.S. equities to overweight from neutral.
“Our U.S. upgrade boils down to a fundamental story underpinned by earnings growth,” BlackRock’s global chief investment strategist Richard Turnill wrote in the firm’s weekly commentary.
“An added bonus: U.S. valuations look slightly more attractive after the February stock market swoon.”
At the same time, BlackRock said it had downgraded European equities to neutral because earnings momentum in Europe, though solid, lags that of other regions. The euro’s strength is also a source of pain, it said.
Emerging markets remain a favored region, according to the commentary.
Turnill wrote that the improving U.S. economy was already boosting earnings growth momentum, and tax cuts and the government’s spending plans have become an accelerant for that trend.
In the fourth quarter, S&P companies’ earnings grew by 15% year over year, and sales growth hit a high not seen since the third quarter of 2011.
Turnill noted that the ratio of analyst upgrades for U.S. large caps to downgrades was at its highest level in 30 years. “Upward revisions are solid globally, but the U.S. strength is unmatched.”
In his view, the robust earnings momentum in the U.S. will continue in the short term and lead to higher returns.
An early February survey of global fund managers found a 12-percentage-point drop in allocations to equities.
The Week Ahead
The release of minutes from late January monetary policy meetings of the U.S. Federal Reserve and the European Central Bank may provide market surprises, according to the BlackRock commentary.
How the Fed characterizes U.S. inflation as it nears the central bank’s target will be a key focus.
Turnill noted that markets raised their expectations for rate hikes last week after U.S. headline and core CPI came in above consensus, and now expect just under three Fed increases this year. These expectations could rise further depending on what the minutes show, he said.
Surprises in the ECB minutes could materialize regarding how the central bank characterizes the pace of European growth and foreign exchange developments.
— Check out 12 Best & Worst Broker-Dealers: Q4 Earnings, 2017 on ThinkAdvisor.