Favoring stocks over bonds has been rewarded this year as equities have climbed to new highs. Even as doubts over tech investment in artificial intelligence (AI) and recession fears stoked volatility, U.S. stocks have outperformed other regions this year on earnings growth and soaring tech valuations. See the chart. Jitters about lofty valuations and U.S. election uncertainty can drive market volatility. Yet on a six- to 12-month horizon, we stay overweight U.S. stocks as markets expect double-digit earnings growth over the next year and falling interest rates. We’re overweight Japanese stocks. Strong earnings growth that has boosted stock performance is slowing but remains resilient to a stronger yen. Europe’s story is slightly different: Earnings have been weak given poor economic growth. We’re underweight euro area stocks overall but see bright spots in sectors like financials and healthcare.
We prefer U.S. over European stocks. The reason: The near-term macro backdrop supports risk-taking in the U.S., even as markets have priced out some rate cuts. The Fed is cutting even as growth and the labor market hold up. We think earnings strength will keep expanding beyond tech, narrowing the gap between tech and other sectors. Earnings for a handful of top companies, mostly tech-related, are expected to grow 19% next year, down from about 30% in 2023 and 2024. Analysts see earnings for the rest of the S&P 500 growing 4% this year and 14% in 2025 after contracting last year, FactSet data show.
Our evolving AI views
We see ample room for the AI theme to run: Its buildout is only in the early stages. Yet investor doubts about tech spending on AI linger. We’ve expanded our AI preference beyond tech to sectors like utilities, energy, real estate and industrials. U.S. utility earnings have grown 8.2% over the past year, the fastest since 2020, based on LSEG data, partly due to AI’s big energy need. Utilities are neck-and-neck with tech as the best-performing sector this year. Our portfolio managers note that industrial companies tied to the AI buildout are seeing more demand than their peers.
Our global stock picks
Outside the U.S, we stay positive on Japanese stocks after trimming our overweight as a stronger yen drags on earnings. Solid wage growth, stronger corporate pricing power and shareholder-friendly reforms support earnings growth. Elsewhere in Asia, hopes for major fiscal stimulus have halted earnings downgrades for Chinese stocks. We’ve turned overweight Chinese stocks given this policy signal but that doesn’t change the long-term, structural challenges we are concerned about.
We stay underweight euro area stocks given weak growth and a limited recovery. Q3 earnings are expected to grow just 3.7% from a year earlier, with revenues still contracting. Yet we have favored outperforming sectors like financials. We also get granular in healthcare as some businesses will benefit more from AI and other mega forces, or structural shifts. We prefer European healthcare companies over their U.S. peers as they face less risk of losing revenue due to drug patents expiring.
Our bottom line
As Q3 earnings season gets underway, we stay overweight U.S. stocks and expect earnings to strengthen in sectors beyond tech. We’re also overweight Japan’s stocks. We’re underweight European equities but get selective in sectors.
Weekly market commentary | BlackRock Investment Institute
Tik4invest
Favoring stocks over bonds has been rewarded this year as equities have climbed to new highs. Even as doubts over tech investment in artificial intelligence (AI) and recession fears stoked volatility, U.S. stocks have outperformed other regions this year on earnings growth and soaring tech valuations. See the chart. Jitters about lofty valuations and U.S. election uncertainty can drive market volatility. Yet on a six- to 12-month horizon, we stay overweight U.S. stocks as markets expect double-digit earnings growth over the next year and falling interest rates. We’re overweight Japanese stocks. Strong earnings growth that has boosted stock performance is slowing but remains resilient to a stronger yen. Europe’s story is slightly different: Earnings have been weak given poor economic growth. We’re underweight euro area stocks overall but see bright spots in sectors like financials and healthcare.
We prefer U.S. over European stocks. The reason: The near-term macro backdrop supports risk-taking in the U.S., even as markets have priced out some rate cuts. The Fed is cutting even as growth and the labor market hold up. We think earnings strength will keep expanding beyond tech, narrowing the gap between tech and other sectors. Earnings for a handful of top companies, mostly tech-related, are expected to grow 19% next year, down from about 30% in 2023 and 2024. Analysts see earnings for the rest of the S&P 500 growing 4% this year and 14% in 2025 after contracting last year, FactSet data show.
Our evolving AI views
We see ample room for the AI theme to run: Its buildout is only in the early stages. Yet investor doubts about tech spending on AI linger. We’ve expanded our AI preference beyond tech to sectors like utilities, energy, real estate and industrials. U.S. utility earnings have grown 8.2% over the past year, the fastest since 2020, based on LSEG data, partly due to AI’s big energy need. Utilities are neck-and-neck with tech as the best-performing sector this year. Our portfolio managers note that industrial companies tied to the AI buildout are seeing more demand than their peers.
Our global stock picks
Outside the U.S, we stay positive on Japanese stocks after trimming our overweight as a stronger yen drags on earnings. Solid wage growth, stronger corporate pricing power and shareholder-friendly reforms support earnings growth. Elsewhere in Asia, hopes for major fiscal stimulus have halted earnings downgrades for Chinese stocks. We’ve turned overweight Chinese stocks given this policy signal but that doesn’t change the long-term, structural challenges we are concerned about.
We stay underweight euro area stocks given weak growth and a limited recovery. Q3 earnings are expected to grow just 3.7% from a year earlier, with revenues still contracting. Yet we have favored outperforming sectors like financials. We also get granular in healthcare as some businesses will benefit more from AI and other mega forces, or structural shifts. We prefer European healthcare companies over their U.S. peers as they face less risk of losing revenue due to drug patents expiring.
Our bottom line
As Q3 earnings season gets underway, we stay overweight U.S. stocks and expect earnings to strengthen in sectors beyond tech. We’re also overweight Japan’s stocks. We’re underweight European equities but get selective in sectors.
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