Europe Surpassing Expectations, U.S. Not


In contrast to the U.S., last week European and Japanese equities advanced by roughly 2.5% and 3%, respectively, extending their year-to-date gains versus the United States.

As usual, fund flows offer a good barometer of investor sentiment. Money continues to flow into stocks, but investors are shifting out of U.S. equities and into non-U.S. markets. Last week witnessed the eighth straight week of outflows from U.S. equity funds, the longest streak since 2004.

Several factors are inhibiting U.S. equity returns. First, the strong dollar continues to pressure earnings for large, global exporters. The latest victim was Hewlett-Packard, whose stock tumbled after the company announced earnings would be negatively affected by the stronger dollar. As more U.S. companies struggle with the currency-related drag on exports, full-year earnings expectations for the S&P 500 have dropped roughly 1.5% over the past four weeks.

But another issue has arisen recently: While U.S. economic data continue to show decent growth, that growth is moderating. Last week, one of the better leading economic indicators, the Chicago Fed National Activity Index, fell back to zero, a significant drop from last fall. The current reading is consistent with U.S. gross domestic product (GDP) growth of around 2.5% this quarter. Indeed, most measures are coming in below expectations, with the exception of labor market statistics. Our read: The U.S. is still doing well, and is still the most robust major economy in the world, just not as well as many had expected.

In contrast, European equities are benefiting from a string of better-than-expected economic numbers, as well as a reduction in the risk associated with Greece and Ukraine. Since mid-January, there has been a meaningful improvement in Citigroup’s Economic Surprise Index. The gains are not just a function of the stronger economies, like Germany, but are extending to the weaker countries on the periphery. Spain notched its fastest GDP growth in seven years.

Timi Oni

Corporate Communications | BlackRock