Some Overseas Markets May Prove More Resilient

Though global markets sold off last week and have continued to slip in recent days, stocks in Europe and Japan are still faring better than their U.S. counterparts, reinforcing my views of these other developed markets.

As I write in my new weekly commentary, “More to Like Overseas as U.S. Stocks Sputter,” there’s one major culprit for U.S. stocks’ poor performance: Revenue growth for U.S. firms remains disappointing, even as earnings are beating expectations (albeit diminished expectations). In contrast, Europe is at least having a good earnings season, while Japanese equities continue to benefit from institutional buying.

Among the U.S. companies whose sales results fell short of expectations, according to Bloomberg data: IBM, Verizon, Yahoo, United Technologies and even Apple. As earnings reports and analyst call transcripts show, many of the companies reporting sales misses cited the strong dollar as a contributing factor. Unfortunately, this may prove a problem in the third quarter as well. Improvements in the U.S. economy have more investors convinced that the Federal Reserve (Fed) will begin lifting interest rates later this year, perhaps as early as September. Such expectations will likely continue to support the dollar.

European equities, meanwhile, at least have the cushion of stronger earnings, partly fueled by the euro’s weakness. In Europe, with Greece fading as a concern at least temporarily, investors are renewing their focus on earnings. According to Bloomberg data, as of Friday, roughly 55 percent of European companies beat estimates, with average year-over-year earnings-per-share growth of 15 percent. Banks and consumer discretionary companies did particularly well, with 75 percent exceeding expectations.

At the same time, Japanese stocks remain supported by Japanese pension funds continued rotation into domestic equities. The three largest public sector pension plans have already increased their equity allocation by more than 5 percent since last spring. However, their allocations remain well below the 25 percent target. This suggests there is room for further institutional buying in the second half of 2015.

The bottom line: Improving earnings in Europe and institutional stock-buying momentum in Japan underscore why I believe European and Japanese equities can continue to outperform U.S. stocks.

Russ Koesterich, CFA, is the Chief Investment Strategist for BlackRock. He is a regular contributor to The Blog.

© BlackRock

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