- BlackRock raised its outlook on US stocks to overweight from neutral, citing the positive effect of fiscal stimulus on earnings growth.
- The firm notes the ratio of upward profit revisions for US companies relative to downward ones is the highest since 1988.
On the heels of the stock market's first 10% correction in two years, BlackRock has turned positive on US equities.
Enticed by the earnings growth that should result from tax cuts, the $6.3 trillion investment firm raised its outlook on US stocks to overweight from neutral.
By BlackRock's measure, the number of US companies getting upward earnings revisions outpaces those getting downward adjustments by a ratio of more than 2-to-1. That's the highest on record, according to data going back to 1988.
The revision ratio "confirms that the fundamental momentum is really in place for the US," Kate Moore, the chief equity strategist for BlackRock, told Business Insider by phone. "We've been waiting for greater real data on the impact of tax cuts and fiscal stimulus on potential earnings before we made an assessment on the US. We can't deny that the US — which was already in very good shape — has been super-charged by this stimulus."
Of course, any investors who found the stock market too expensive before were aided by the sharp selloff seen in major indexes the week before last. As traders sold their stocks amid inflationary concerns and spiking bond yields, the entry point for investors got more appealing.
"The timing is helped by the weakness in the market we saw the week before last," said Moore. "We saw a multiple contraction during that period. But the evolution of our call is all about the earnings story."
Still, BlackRock notes accelerating inflationary pressure could hurt margins, while increasing real rates may also reduce multiples. But the firm retains a high conviction when it comes to its equity call.
"We see the tax windfall providing an earnings buffer against these forces," Richard Turnill, BlackRock's global chief investment strategist wrote in a client note.