Sticking with US tech surge
Market take
Weekly video_20240624
Carolina Martinez Arevalo
Opening frame: What’s driving markets? Market take
Camera frame
US stocks have climbed to all-time highs thanks to the technology sector.
We’re less concerned than some about the small group of tech stocks driving gains.
Title slide: Sticking with US tech surge
1: Tech sector rolls on
Tech stocks have surged this year, fueled by excitement over artificial intelligence and investor preference for quality given greater macro uncertainty.
Tech firms have so far been able to deliver on and beat lofty earnings expectations, with earnings growing 23% year over year in Q1.
2: Strong balance sheets
We also like tech for its strong balance sheets and we are less concerned about valuation metrics.
Tech firms have free cash flows as a share of sales that are nearly doubled those of the broader market and they have the highest margins across sectors.
3: Broadening gains
Though at a slower pace than tech, other sectors are also seeing gains this year.
This is due to a recovery in margins as cost pressures ease and support from nominal GDP growth that looks set to remain above the pre-pandemic average.
Outro: Here’s our Market take
We’re less concerned by concentration in US tech stocks.
We stay overweight US stocks on a six- to 12-month, tactical horizon and still prefer the AI theme.
As stock gains broaden, we still favor healthcare given support from recovering earnings, drug innovation and demographic needs. And we like industrials as they’ll help build out AI infrastructure.
Closing frame: Read details:
www.blackrock.com/weekly-commentary
Tech rally rolls on
We see a small group of tech winners leading stock gains as a feature of the artificial intelligence (AI) theme – not a flaw. We stay overweight US stocks.
Market backdrop
The S&P 500 notched a fresh all-time high last week, led by tech stocks. US 10-year Treasury yields held steady near 4.25% during the holiday-shortened week.
Week ahead
We’re eyeing to what extent US PCE inflation for May shows a slowing of services inflation after upside surprises earlier in the year.
US stocks have climbed to all-time highs thanks to the technology sector. We’re less concerned than some in the market about the small group of tech stocks driving gains. Why? First, excitement over AI is being met by tech firms delivering on and beating high earnings expectations. Second, profit margins for tech are leading the market, but they’re also recovering in other sectors as cooling inflation eases costs pressures on margins. We stay overweight US stocks on the AI theme.
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Tech strength rolls on
S&P 500 performance, tech vs. the rest, 2023-2024
Past performance is no guarantee of future results. Index returns do not account for fees. It is not possible to invest directly in an index. Source: BlackRock Investment Institute, with data from LSEG Datastream, June 2024. Notes: The chart shows the index performance for the S&P 500, for the information technology (IT) sector of the S&P 500 and the S&P 500 excluding the IT sector. The data has been rebased so that January 2023 = 100.
We think strong gains for tech stocks have been fueled by market focus on AI and investors preferring quality given high macro and market uncertainty. The sector is up 30% this year, nearly four times higher than the rest of the S&P 500, according to LSEG Datastream data. See the green and orange lines in the chart. Looking back to 2023, tech’s dominance is even clearer: The sector has soared 100% since then, while the rest of the index rose 24%. AI has helped drive that outperformance by brightening corporate earnings for tech firms. Analysts expect they’ll rise 20% in the next 12 months – well above forecasts for the rest of the market. Tech firms have so far delivered on lofty expectations: Their earnings grew 23% year over year in Q1. In a world where mega forces – big structural shifts – drive returns now and in the future, we eye the short- and long-term impacts of AI on earnings.
Strong balance sheets are also a reason we like tech, and we are less concerned about valuation metrics. Free cash flows – excluding operational costs – as a share of sales are nearly double for tech than for the broader market, and tech has the largest profit margins across sectors, LSEG Datastream data show. Plus, many top tech names are highly profitable and cash-flush, allowing them to fund the buildout of AI infrastructure such as data centers. A search for such quality may have spurred investors to flock to US stocks even more in recent weeks as their European counterparts have retreated. Much of the slide in European stocks came after the results of the European Union elections and news of a snap election in France.
Broadening earnings
US tech strength is overshadowing gains that are broadening out to other sectors – up about 8% so far this year. Eight of 11 of the S&P 500 sectors saw higher margins in Q1 versus the same period last year. The reason: support from nominal GDP growth that looks set to remain above the pre-pandemic average due to higher inflation. That outlook seems likely even as the pace of real, or inflation-adjusted, growth slows. Inflation falling from its pandemic peaks – though remaining high – has eased pressure on margins by lowering costs. Guided by mega forces, we see sectoral opportunities as risk appetite broadens out. We still favor healthcare given support from recovering earnings, drug innovation and aging populations. We also like the industrial sector because it will help build out the infrastructure needed for AI and the low-carbon transition. Supply chains rewiring along geopolitical lines will also affect the sector as companies and countries bring production closer to home.
What could halt the climb in tech stocks? Markets could lose favor for the sector if hopes for AI are dampened, such as if they feel corporate spending on AI hasn’t paid off in a boost to earnings or margins. Any regulatory changes limiting adoption could also affect AI’s potential to keep supporting tech. In a less likely scenario, other sectors could jump ahead of tech if growth accelerates, and inflation falls enough to allow the Federal Reserve to cut interest rates more than expected.
Our bottom line
The concentration in US tech stocks is a feature, not a flaw, of the AI theme. We stay overweight US stocks on a six- to 12-month, tactical horizon and still prefer the AI theme. We like industrials and healthcare as stock gains broaden.
Market backdrop
The S&P 500 notched a fresh all-time high last week, led by tech stocks. US 10-year Treasury yields held steady near 4.25% during the holiday-shortened week. Since France’s snap parliamentary election was announced, spreads of 10-year French government bond yields over German bunds have hovered near their widest levels since the euro area crisis. The Bank of England left rates unchanged – but we think it will likely start rate cuts in August after the early July election.
We’re eyeing May US PCE data – the Fed’s preferred inflation measure – for signs that services inflation is easing. Cooler-than-expected US CPI data for May showed falling core goods prices. But sticky services prices mean inflation will continue to outpace the Fed’s 2% goal in the medium term.
Week ahead
Past performance is not a reliable indicator of current or future results. Indexes are unmanaged and do not account for fees. It is not possible to invest directly in an index. Sources: BlackRock Investment Institute, with data from LSEG Datastream as of June 20, 2024. Notes: The two ends of the bars show the lowest and highest returns at any point year to date, and the dots represent current year-to-date returns. Emerging market (EM), high yield and global corporate investment grade (IG) returns are denominated in US dollars, and the rest in local currencies. Indexes or prices used are: spot Brent crude, ICE US Dollar Index (DXY), spot gold, MSCI Emerging Markets Index, MSCI Europe Index, LSEG Datastream 10-year benchmark government bond index (US, Germany and Italy), Bank of America Merrill Lynch Global High Yield Index, J.P. Morgan EMBI Index, Bank of America Merrill Lynch Global Broad Corporate Index and MSCI USA Index.
June 25
US consumer confidence
June 27
US durable goods
June 28
US PCE; Japan unemployment data
June 30
China NBS manufacturing PMI
Read our past weekly commentaries here.
Big calls
Our highest conviction views on tactical (6-12 month) and strategic (long-term) horizons, June 2024
| Reasons | ||
|---|---|---|
| Tactical | ||
| US equities | Our macro view has us neutral at the benchmark level. But the AI theme and its potential to generate alpha – or above-benchmark returns – push us to be overweight overall. | |
| Income in fixed income | The income cushion bonds provide has increased across the board in a higher rate environment. We like short-term bonds and are now neutral long-term US Treasuries as we see two-way risks ahead. | |
| Geographic granularity | We favor getting granular by geography and like Japan stocks in DM. Within EM, we like India and Mexico as beneficiaries of mega forces even as relative valuations appear rich. | |
| Strategic | ||
| Private credit | We think private credit is going to earn lending share as banks retreat – and at attractive returns relative to public credit risk. | |
| Fixed income granularity | We prefer inflation-linked bonds as we see inflation closer to 3% on a strategic horizon. We also like short-term government bonds, and the UK stands out for long-term bonds. | |
| Equity granularity | We favor emerging over developed markets yet get selective in both. EMs at the cross current of mega forces – like Mexico, India and Saudi Arabia – offer opportunities. In DM, we like Japan as the return of inflation and corporate reforms brighten our outlook. | |
Note: Views are from a US dollar perspective, June 2024. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any particular funds, strategy or security.
Tactical granular views
Six to 12-month tactical views on selected assets vs. broad global asset classes by level of conviction, June 2024.
Our approach is to first determine asset allocations based on our macro outlook – and what’s in the price. The table below reflects this. It leaves aside the opportunity for alpha, or the potential to generate above-benchmark returns. The new regime is not conducive to static exposures to broad asset classes, in our view, but it is creating more space for alpha. For example, the alpha opportunity in highly efficient DM equities markets historically has been low. That’s no longer the case, we think, thanks to greater volatility, macro uncertainty and dispersion of returns. The new regime puts a premium on insights and skill, in our view.
| Asset | Tactical view | Commentary | ||||
|---|---|---|---|---|---|---|
| Equities | ||||||
| United States | Benchmark |  |
We are neutral in our largest portfolio allocation. Falling inflation and coming Fed rate cuts can underpin the rally’s momentum. We are ready to pivot once the market narrative shifts. | |||
| Overall |  |
We are overweight overall when incorporating our US-centric positive view on artificial intelligence (AI). We think AI beneficiaries can still gain while earnings growth looks robust. | ||||
| Europe |  |
We are underweight. While valuations look fair to us, we think the near-term growth and earnings outlook remain less attractive than in the US and Japan – our preferred markets. | ||||
| U.K | |
We are neutral. We find attractive valuations better reflect the weak growth outlook and the Bank of England’s sharp rate hikes to fight sticky inflation. | ||||
| Japan |  |
We are overweight. Mild inflation and shareholder-friendly reforms are positives. We see the BOJ policy shift as a normalisation, not a shift to tightening. | ||||
| Emerging markets | |
We are neutral. We see growth on a weaker trajectory and see only limited policy stimulus from China. We prefer EM debt over equity. | ||||
| China | |
We are neutral. Modest policy stimulus may help stabilize activity, and valuations have come down. Structural challenges such as an aging population and geopolitical risks persist. | ||||
| Fixed income | ||||||
| Short US Treasuries | |
We are overweight. We prefer short-term government bonds for income as interest rates stay higher for longer. | ||||
| Long US Treasuries | |
We are neutral. The yield surge driven by expected policy rates has likely peaked. We now see about equal odds that long-term yields swing in either direction. | ||||
| US inflation-linked bonds | |
We are neutral. We see higher medium-term inflation, but cooling inflation and growth may matter more near term. | ||||
| Euro area inflation-linked bonds | |
We are neutral. Market expectations for persistent inflation in the euro area have come down. | ||||
| Euro area government bonds | |
We are neutral. Market pricing reflects policy rates in line with our expectations and 10-year yields are off their highs. Widening peripheral bond spreads remain a risk. | ||||
| UK Gilts | |
We are neutral. Gilt yields have compressed relative to US Treasuries. Markets are pricing in Bank of England policy rates closer to our expectations. | ||||
| Japan government bonds |  |
We are underweight. We find more attractive returns in equities. We see some of the least attractive returns in Japanese government bonds, so we use them as a funding source. | ||||
| China government bonds | |
We are neutral. Bonds are supported by looser policy. Yet we find yields more attractive in short-term DM paper. | ||||
| US agency MBS | |
We are neutral. We see agency MBS as a high-quality exposure in a diversified bond allocation and prefer it to IG. | ||||
| Global investment grade credit | |
We are underweight. Tight spreads don’t compensate for the expected hit to corporate balance sheets from rate hikes, in our view. We prefer Europe over the US | ||||
| Global high yield | |
We are neutral. Spreads are tight, but we like its high total yield and potential near-term rallies. We prefer Europe. | ||||
| Asia credit | |
We are neutral. We don’t find valuations compelling enough to turn more positive. | ||||
| Emerging market - hard currency | |
We are overweight. We prefer EM hard currency debt due to its relative value and quality. It is also cushioned from weakening local currencies as EM central banks cut policy rates. | ||||
| Emerging market - local currency | |
We are neutral. Yields have fallen closer to US Treasury yields. Central bank rate cuts could hurt EM currencies, dragging on potential returns. | ||||
Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in an index. Note: Views are from a US dollar perspective, June 2024. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast or guarantee of future results. This information should not be relied upon as investment advice regarding any particular fund, strategy or security.
Euro-denominated tactical granular views
Six to 12-month tactical views on selected assets vs. broad global asset classes by level of conviction, June 2024.
| Asset | Tactical view | Commentary | ||
|---|---|---|---|---|
| Equities | ||||
| Europe ex UK | |
We are underweight. While valuations look fair to us, we think the near-term growth and earnings outlook remain less attractive than in the US and Japan – our preferred markets. | ||
| Germany | |
We are neutral. Valuations remain moderately supportive relative to peers. The earnings outlook looks set to brighten as global manufacturing activity bottoms out and financing conditions start to ease. Longer term, we think the low-carbon transition may bring opportunities. | ||
| France | |
We are underweight. Relatively richer valuations offset the positive impact from past productivity enhancing reforms and favorable energy mix. | ||
| Italy | |
We are underweight. Valuations and earnings dynamics are supportive. Yet recent growth outperformance seems largely due to significant fiscal stimulus in 2022-2023 that cannot be sustained over the next few years, we think. | ||
| Spain | |
We are neutral. Valuations and earnings momentum are supportive relative to peers. The utilities sector looks set to benefit from an improving economic backdrop and advances in AI. Political uncertainty remains a potential risk. | ||
| Netherlands | |
We are underweight. The Dutch stock markets' tilt to technology and semiconductors, a key beneficiary of higher demand for AI, is offset by relatively less favorable valuations than European peers. | ||
| Switzerland | |
We are underweight in line with our broad European market positioning. Valuations remain high versus peers. The index’s defensive tilt will likely be less supported as long as global risk appetite holds up, we think. | ||
| UK | |
We are neutral. We find that attractive valuations better reflect the weak growth outlook and the Bank of England’s sharp rate hikes to deal with sticky inflation. | ||
| Fixed income | ||||
| Euro area government bonds | |
We are neutral. Market pricing reflects policy rates broadly in line with our expectations and 10-year yields are off their highs. | ||
| German bunds | |
We are neutral. Market pricing reflects policy rates broadly in line with our expectations and 10-year yields are off their highs. | ||
| French OATs | |
We are neutral. Valuations look less compelling following pronounced narrowing of French spreads to German bonds. Elevated French public debt and a slower pace of structural reforms remain challenges. | ||
| Italian BTPs | |
We are neutral. The spread over German bunds looks tight given Italy’s recently higher-than-expected deficit-to-GDP-ratio and a trajectory for the debt ratio in the next few years which is stable at best. Other domestic factors remain supportive, with growth holding up well relative to the rest of the euro area. Italian households are also showing a significant willingness to increase their direct holding of BTPs amid high nominal rates and yields. | ||
| UK gilts | |
We are neutral. Gilt yields have compressed relative to US Treasuries. Markets are pricing in Bank of England policy rates closer to our expectations. | ||
| Swiss government bonds | |
We are neutral. The Swiss National Bank has started to cut policy rates given reduced inflationary pressure and the appreciation of the Swiss franc. | ||
| European inflation-linked bonds | |
We are neutral. Market expectations for persistent inflation in the euro area have come down. | ||
| European investment grade credit | |
We are neutral. We maintain our preference for European investment grade over the US given more attractive valuations amid decent income. | ||
| European high yield | |
We are overweight. We find the income potential attractive. We still prefer European high yield given its more appealing valuations, higher quality and lower duration than in the US Spreads compensate for risks of a potential pick-up in defaults, in our view. | ||
Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in an index. Note: Views are from a euro perspective, June 2024. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast or guarantee of future results. This information should not be relied upon as investment advice regarding any particular fund, strategy or security.
Meet the authors
Jean Boivin
Head – BlackRock Investment Institute
Wei Li
Global Chief Investment Strategist — BlackRock Investment Institute
Beata Harasim
Senior Investment Strategist — BlackRock Investment Institute
Carolina Martinez Arevalo
Portfolio Strategist – BlackRock Investment Institute
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