Earnings Momentum Builds for Non-U.S. Developed Market Equities
Evidence is mounting that it may be a good time to invest in international developed market equities. For several years, U.S. equities have been the main reason that the MSCI World® Index has outperformed the MSCI EAFE® Index.* That position of dominance may be about to change as strong earnings in Japan and a rebound in European stocks look poised to propel these markets past the U.S. in 2015.
As shown in the chart below, Japan has the highest level of positive earnings revisions of any major region by a wide margin – not at all surprising given the uptick in share buybacks and acquisitions, reduced effective tax rate (38% vs. 24% in the U.S.), and flat labor compensation as many of Japan’s older, higher paid workers are retiring. In addition, even though Europe’s earning revisions are about average compared to other world regions, it is experiencing the strongest positive momentum. In contrast, earnings revisions for the U.S. (and emerging markets) are at low levels and decelerating.
Reproduced from Bank of America Merrill Lynch, European Earnings Revision Ratio, 2 April 2015. Reprinted with permission.
*Both the MSCI EAFE and MSCI World indexes measure developed foreign market equity performance, but the MSCI EAFE excludes the U.S. and Canada. Other developed markets included in each index: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the UK.