In a diametrically opposed forecast to Morgan Stanley, BlackRock’s best and brightest have turned increasingly bullish on stocks, raising them to overweight due to changes in tax laws and corporate spending plans which will end up “supercharging U.S. earnings growth expectations.”
BlackRock chief equity strategist, Kate Moore, says that “the fundamental story is the best it’s been, which is surprising given how far we are into this cycle.”
Investors are failing to appreciate the impact of the tax law changes and upcoming corporate spending changes, while earnings growth and dividends will fuel returns amid already-high valuations.
“We remain very constructive on equities in general,” said Moore. “The U.S. just got an injection of stimulus that no place else in the world did.” As such, BlackRock reduced their rating on European equities to neutral.
“We were encouraged by the strong top line numbers going into the fourth quarter, but now they’re supercharged by the tax cut and fiscal stimulus,” said Moore. Fourth quarter earnings growth for the S&P 500 topped 15%, and sales growth was the highest in six years. Meanwhile, sixty percent of S&P 500 companies provided guidance that exceeded expectations.
“What happened to the U.S. on the back of tax cuts and fiscal stimulus is something we’ve never observed. All regions are showing improvements in positive earnings revisions but nothing like the U.S.”
BlackRock monitors earnings revisions, which can be a key indicator for the market, and the percent of positive revisions is at a record pace. They are now running at a rate of two upgrades for every downgrade, or a ratio of 2. That ratio has averaged 0.8 based in the data which goes back to 1988, Moore said.
“What happened to the U.S. on the back of tax cuts and fiscal stimulus is something we’ve never observed,” added Moore. All regions are showing improvements in positive earnings revisions but nothing like the U.S. Europe also has solid earnings momentum but it lags the U.S., and higher revisions in Japan are “noisy.” –CNBC
“This is a very different cycle, at a time when fundamentals are already solid,” said Moore. “We will have to be very vigilant and try to stay focused not just on what happens to earnings but as to what happens with inflation pressures, and the impact that could have on margins. The big risk is inflationary pressure eroding margins.”