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Summary
- The chart shown above was shared by Richard Turnill and the BlackRock Investment Institute in BlackRock’s global weekly commentary.
- The chart displays year-to-date equity returns for a selection of major country/regions through the end of July. The orange circle represents the total return for each country/region. Total return is then broken out between dividends (blue shading), multiple expansion (purple shading), which is calculated as price change minus earnings growth, and earnings growth (green shading).
- BlackRock’s view is that earnings growth, which has been flat to negative so far in 2016, would need to improve in order to generate further equity market gains.
- They are cautious for the second half because they believe an improvement in revenues and earnings may already be reflected in market prices.
- BlackRock’s main takeaway is that investors need to be more selective with their investments at these levels.
Our Take
- BlackRock’s global weekly commentary is one of many market commentaries that we review on a regular basis. We like this chart because we believe it conveys a significant amount of information about the environment for equities in one picture.
- We believe the combination of positive equity market returns and anemic, or even negative, corporate earnings growth sets the stage for a potentially challenging period for equities over the remainder of 2016.
- We share BlackRock’s view that any further equity market gains without a subsequent improvement in underlying earnings growth will lead to heightened volatility.
- Historically, during periods of heightened volatility, investors have gravitated to companies that have displayed earnings stability and companies that pay dividends. Dividend growers are particularly favored.
- For a number of reasons, we are maintaining a relatively defensive approach in our portfolio construction, and U.S. large-cap dividend payers are among our favorite ideas.