We are raising our year-end targets for continental European and Japanese Equities. 
Since the beginning of the year, both markets have risen by 19% and 12% respectively, bringing levels close to our previous targets. From current levels our new forecasts imply a 13% total return for continental European markets, 9% for Japanese markets and 6% for global stock markets through to the end of 2015. 

Earnings are everything: Our expectations for further upside stem from an acceleration in earnings. However, with valuations only in line with historical norms and the equity risk premium still high, investors do not appear to be pricing in a surge in earnings.

Overweigh continental Europe: The long-awaited recovery in European earnings finally seems to be here – earnings revisions are positive for the first time since 2011. While we admit that the overweight Europe view is no longer anti-consensus, we believe that better earnings momentum is likely to remain supportive of further outperformance. 

Overweight Japan:  Japanese earnings revisions are faring best globally. Japanese corporates are increasing shareholder payouts too, and international participation in the really thus far seems low. 

Underweight US: US earnings reversions are faring worst for the first time in five years. We recommend a still counter-consensus underweight stance here. 

Prefer cyclicals to defensives: While the gap between the performance of cyclical sectors and economic indicators has corrected a little bit, we believe that there is more to go. We are overweight financials, consumer discretionary, industrials, materials and technology. We are underweight staples, healthcare and telecoms. 

Eoin Treacy's view

Here is a link to the full report.

In preparing my talk for the MTA Symposium last week I created this chart of the MSCI World Ex-US relative to the S&P 500 in log scale. It represents a powerful illustration of just how much the USA has outperformed over the last five years when the world is rebased to US Dollars. 

The fact that the ratio is now back to test the 2001 low, is finding support and that this is occurring against a background where the world ex-US is engaging in massive monetary easing suggests the rest of the world has potential to outperform in real terms. 

After the Bank of Japan began its quantitative easing program it took a while for corporations’ estimates of earnings potential to catch up with the performance of the currency and stock market. A lengthy status quo where they had to contend with a weak economy, strong currency and moribund stock market had a conditioning effect so that expectations of future potential were muted. That is now changing as earnings surprise on the upside and investors come around to the idea that conditions are really changing. 

Europe is now in a similar situation. The Eurozone’s economic climate has been so pessimistic that people are underestimating the role massive monetary accommodation can have on asset prices. The fact that the ECB had taken €1 trillion out of circulation and is now putting it back in represents an economic headwind turning into a tailwind. There is plenty of potential for Eurozone earnings to outperform as long as this remains the case. 

The Euro STOXX Index’s (P/E 25.14, DY 2.89%) has experienced a powerful breakout from a medium-term range, in nominal terms, and its reactions to date have been relatively shallow at approximately 12 points. A pullback of greater than that would be required to signal mean reversion is underway.