US investment manager BlackRock has upgraded its outlook for US equities on the bases of robust earnings growth while also shifting to a neutral stance on the eurozone.
Referring to the US, Kate Moore, BlackRock’s chief equity strategist, said: "The fundamental story is the best it's been, which is surprising given how far we are into this cycle."
BlackRock's team believe the impact of corporate tax law changes (President Trump reduced corporate tax rates) and company spending plans are still under-valued by investors. They expect earnings growth and dividends to boost returns, in a market that already has historically 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 we have more information from companies as they incorporate more impact from the tax cuts and stimulus, we have reached a place where we are quite confident based on the fundamental backdrop,” Moore said. .
US firms reported 15% earnings growth in the fourth quarter versus the previous year and estimates for 2018 have increased by more than seven percentage points to 19%.
BlackRock has shifted its recommendation on European equities from overweight to neutral. “We are not seeing any deterioration in the prospects in Europe,” Moore said.
“It’s just a relative call where the stimulus in the US and tax cuts is providing a level of earnings growth much higher than we are expecting in Europe.”
BlackRock said lower equity prices after recent turbulence and a fall in valuation was an “an added bonus” but not the driver of its enthusiasm for US stocks.
Moore said her favourite sectors currently are technology and financials. She expects technology to gain from increased spending by corporations, benefiting from tax law changes. She suggested another boost to the stock market from tax law changes might be more corporate buybacks and acquisitions.