Riding a global earnings upswing

Upbeat global earnings are confirming that the benefits of reflation ? rising wages, growth and inflation ? are spreading beyond the U.S. We see room for more upside for corporate profits, especially in Europe and Japan. Analysts have become increasingly upbeat about corporate earnings in Japan, emerging markets and Europe since late 2016. Earnings estimates have been revised up in these markets, and lowered slightly in the U.S., as the chart shows. Japan leads the crowd.

Here to stay: earnings momentum

Global earnings are collectively posting some of their best performance since the end of the financial crisis. We expect this trend to extend as world growth gains momentum. Our BlackRock GPS, which offers an early peek at the likely evolution of growth expectations for key economies, signals upside surprises for Japan, France and Germany. We believe this growth will translate into even stronger earnings in these markets over coming quarters, similar to the U.S. experience in the second half of 2016.

Japan’s earnings are particularly impressive. The December quarter pre-tax profits rose 11% on the year to the highest level in a decade. The rebound in commodity prices, a softer euro and stronger economic growth are setting European earnings on course for the best quarter since 2011. But investors are just warming up to Japanese and European shares ? one reason we favor both over the U.S. Our analysis shows few signs of overly bullish positions on Japanese and European equities, suggesting more room for investors to step in.

Two sector trends stand out globally: Steeper yield curves and improving net interest margins have boosted profits for global financials, while long-term demand trends have lifted technology revenues. Management sentiment, which BlackRock’s Scientific Active Equity team captures by text mining company conference calls, reflects an upbeat and improving outlook in these sectors.