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Fund Managers Raise Allocation to U.S. Stocks to Highest Since January 2015

Shift to U.S. comes amid under performance in other overseas equities markets.

Global fund managers are putting more of their money into U.S. equities as sales and earnings momentum has led to the outperformance of stocks here compared to other regions across the globe.

Fund managers’ allocations to U.S. stocks rose by 10 percentage points this month to a net 19% overweight, the highest since January 2015, making the U.S. the most popular region for equity investment for the first time in five years, according to the most recent Bank of America Merrill Lynch Fund Manager Survey 1. The monthly survey of fund managers was conducted during the period of August 3-9.

For 57% of fund managers surveyed, a trade war was the biggest tail risk, topping the list for the third straight month, though it was down slightly from July. This was evident in average cash balances which increased to 5.0%, up from 4.7% and the 10-year average of 4.5%.

There is also not a clear majority in favor of whether economic growth will continue in a synchronized fashion or decouple with 32% of fund managers seeing U.S. growth decelerating and 28% expecting Asia and Europe to accelerate.

“With investors telling us they are long on the U.S., the Fed and cash, our view remains: peak profits, policy and returns,” Michael Hartnett, Bank of America Merrill Lynch’s chief investment strategist, said in this report 2. “Rising corporate leverage concerns say bonds should outperform stocks, while a weaker profit outlook suggests defensives could outperform cyclicals.”

A net 67% of recipients said the U.S. was the most favorable region for corporate profit expectations – the highest level in 17 years. Indeed, the current earnings season in the U.S. continues to feature companies posting earnings and revenues that beat analysts’ expectations.

Of the 467 companies in the S&P 500 that had reported as of August 17, 79.2% reported earnings above expectations – above the long-term average of 64.0%, according to Thomson Reuters I/B/E/S 3. Slightly more than 72% of companies also reported revenues above estimates, beating the long-term average of 60.0%.

The figures from Thomson Reuters I/B/E/S also show that second quarter earnings for companies in the S&P 500 are expected to increase 24.6% compared to a year ago, but 21.6% after excluding the energy sector. In terms of the top line, revenues are estimated to have grown by 9.4% compared to the same period a year ago, and by 8.3% after excluding the energy sector.

For larger capitalization companies in Europe, earnings and sales momentum hasn’t been as strong as it has for companies in the S&P 500. As of August 21, second quarter earnings for companies in the Stoxx Europe 600 are expected to rise by 9.6% compared to a year ago, or 5.5% after excluding the energy sector. Top-line growth is estimated to increase by 2.9% compared to the prior-year period, but revenues are actually expected to decrease by 0.5% when excluding the energy sector, according to Thomson Reuters I/B/E/S 4.

Nor are European companies’ figures outpacing analysts’ estimates at a pace similar to that of companies in the S&P 500. According to figures published August 21 by Thomson Reuters I/B/E/S, of the 273 companies in the Stoxx Europe 600 that had reported second quarter earnings, 49.5% reported results that exceeded analysts’ estimates, whereas 50% of companies typically beat earnings-per-share estimates. In addition, of the 306 companies that reported revenues, 60.8% reported revues above estimates, above the 54.8% that beat forecasts in a typical quarter.

U.S. Stock Indexes Outperforming Most Other World Markets

Perceived safer haven if trade war escalates; forward-earnings momentum

Major indexes in the U.S. continue to retrace the ground lost since their highs in late January. Through August 21, the S&P 500 has risen by 7.1% and posted an intraday record high during the August 21 trading session. The Dow Jones Industrial Average has gained 4.5%, and the Nasdaq Composite is up by 13.8% ─ demonstrating the leadership of the technology sector.

Market indexes overseas haven’t been able to gain similar traction. The Stoxx Europe 600 has declined 1.3% during the same period, while the MSCI World ex-USA Index is down by nearly 5.3%. Asian markets have also underperformed against the U.S. with the MSCI All Country Asia Pacific Index down nearly 6.3%.

And with the U.S. economy representing about 24.0% of the world’s economic output (based on 2017 figures from the World Bank 5) and China representing another 15.0% or so, an escalation in the two nation’s brewing trade war could negatively impact the global economy. And with that in mind, global equity indexes as well.

Research published in late March from Morgan Stanley Capital International 6 found that publicly-traded companies in China’s information technology and energy sectors are the most exposed to the U.S. economy. In contrast, the U.S. information technology, materials, industrials, consumer staples and energy sectors all have relatively high exposure to China’s economy.

In terms of sector-level revenue exposure, international developed markets have more exposure to the U.S. overall, particularly in the healthcare and consumer discretionary sectors. Emerging markets and Asia ex-Japan are more exposed to China by wide margins across all sectors, with the exception of the information technology and consumer discretionary sectors where the differences are smaller.

Recent strength in the dollar and demand for safe assets – the yield on the 10-year Treasury note has remained below 3.00% since late May – have underpinned a “Stay Home” investment strategy compared to a “Go Global” strategy in response to an escalating trade war. “All this suggests that the greenback and U.S. financial assets are both viewed as the winners in a trade war,” Ed Yardeni, president of Yardeni Research Inc., wrote in this August 18 opinion piece on MarketWatch 7.

Forward earnings for U.S. companies have also outpaced those of their overseas peers. “The main reason why Stay Home has been outperforming Go Global since the start of the bull market is that the forward earnings (i.e., the time-weighted average of consensus estimates for this year and next year) of the US MSCI stock price index has outpaced the forward earnings of the All Country World ex-US MSCI (in local currencies),”Yardeni wrote, noting that MSCI’s benchmark in the U.S. is up 172% since bottoming during the week of April 30, 2009, while the All Country World ex-U.S. index has gained 78% during the same period in local currency terms.


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Sources for Financial Data:

S&P 500:

Dow Jones Industrial Average:

Stoxx Europe 600:



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