BlackRock is a lot more bullish on US stocks after tax cuts

Moore said analysts have been ratcheting up their earnings forecasts based on what companies said during earnings season. The expectation is that earnings growth this year could now be 19 percent. Sixty percent of S&P 500 companies provided guidance that exceeded expectations.

BlackRock monitors earnings revisions, which can be a key indicator for the market, and the percent of positive revisions is at a record pace. They are now running at a rate of two upgrades for every downgrade, or a ratio of 2. That ratio has averaged 0.8 based in the data which goes back to 1988, Moore said.

“What happened to the U.S. on the back of tax cuts and fiscal stimulus is something we’ve never observed,” she said. All regions are showing improvements in positive earnings revisions but nothing like the U.S. Europe also has solid earnings momentum but it lags the U.S., and higher revisions in Japan are “noisy.”

She added: “While we are really making this constructive call on the U.S., in the next three to six months we do recognize the pace of upgrades and the pace of earnings growth will likely slow. We will have to watch very closely…We are on a rocket ship at the moment.”

But Moore said the landing does not have to be messy. “It can take off with a bang. I don’t know if ends with a bang. Rockets can come down and land gracefully, if they’re well engineered,” she said.

Risks to the bull market are higher inflation and rising real rates, and for now the strategists said they see modestly higher inflation and gradually rising rates.

“This is a very different cycle, at a time when fundamentals are already solid,” said Moore. “We will have to be very vigilant and try to stay focused not just on what happens to earnings but as to what happens with inflation pressures, and the impact that could have on margins. The big risk is inflationary pressure eroding margins.”

Moore said her favorite sectors are technology and financials. Technology should gain from increased spending by corporations, benefiting from tax law changes. She said the other boosts to the market from tax law changes should be more corporate buybacks and acquisitions.

Source: BlackRock