BlackRock’s Monthly Market Outlook for Financial Advisors

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I’m Carolyn Barnette, Head of BlackRock’s Market and Portfolio Insights for U.S. Wealth team, here with your June Advisor Outlook update.

As we kick off the summer, we’re seeing a lot of green across the markets: stocks are up following a season of stronger-than-expected earnings, and bonds are up as decelerating inflation has appeared to take the possibility of Fed hikes off the table.

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Slide 4: Resilient U.S. economy keeps us optimistic

We’re seeing signs of a resilient economy both at the macro and micro level – a U.S. recession appears to be off the table as GDP growth stays positive… and the economy is projected to continue growing at a healthy level.

We’re also seeing expectations for U.S. stock earnings increase in the coming years, and expand beyond the megacaps that have driven performance most recently. While value stocks struggled to keep up in 2023, projections are for earnings growth on the S&P 500 Value to catch up to broader megacaps as soon as next year.

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Slide 5: Market pricing suggests a first Fed cut in late 2024

Resilient growth gives the Fed less of a reason to rush to cut rates, and policy rate expectations have swung with inflation readings this year. Markets are currently pricing in a first Fed cut later in 2024, with roughly coin flip odds of a first cut in September and higher odds in the later meetings this year.

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Slide 11: Within core bonds, we prefer the belly

Now, we’ve seen some pretty big dispersion in advisor positioning as we approach a Fed pivot… the average advisor has a duration of about 5 years, but we still see more than 25% of advisors with a duration of 4 years or less. For those who are still underweight, now might be a good time to start extending into the belly of the curve – the current inverted shape of the treasury curve combined with potential policy rate cuts may make that 3-7 year space a sweet spot for capturing yield and also potential price appreciation if rates fall.

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Slide 12: Our best ideas to complement core bonds

We’re also, for those who already have a healthy core bond allocation, complementing core bonds in three key areas:

First, international bonds. While we may not see Fed cuts very soon, international Central Banks may be poised to cut more quickly: slower growth and lower inflation should allow them more flexibility to lower rates sooner.

Second, plus sector bonds. High absolute levels of yield make these plus sectors attractive – and even though spreads are tight, all-in yields are still well above historical averages.

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Slide 14: Alternatives have done well when rates are high

And third - diversifying alternatives. In past periods of high cash rates, alternatives have done really well, delivering competitive returns with reasonable levels of risk.

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Slide 3: June key insights

So, to sum up, I’ll leave you with our top themes for June:

Strong growth suggests maintaining an overweight to stocks over bonds, while dispersion rewards selectivity – restrictive interest rates continue to weigh more heavily on small caps, while artificial intelligence-linked companies have continued to thrive. Sticky inflation suggests that U.S. rates will stay high. Inflation has decelerated, but still remains high. Cash plus alternatives should continue to do well in this environment, and there may also be opportunities to take advantage of central bank dispersion by expanding into international bonds. And, take advantage of high yields, but be selective in risk taking. A positive economic outlook should continue to support credit, but tight spreads and differing levels of rate sensitivity will make a robust risk management process critical.

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Slide 16: Our best portfolio implementation ideas for today

New this month, we’ve also put together an implementation guide on our key themes, translating each theme into portfolio implications.

Let’s start with ‘strong growth supports stocks over bonds’ –consider adding to U.S. quality stocks, sourced from bonds. We’re also seeing opportunities to shift from public small caps to private equity.

Sticky inflation suggests U.S. rates may stay relatively high. Our top ideas to play this are via ‘cash plus’ alternatives, sourced from cash or bonds, and international bonds, sourced from U.S. long duration.

And last, take advantage of high yields, but be selective in risk taking. We’re looking to ‘plus’ sector bonds here – CLOs, high yield, and EM debt – and also private credit, sourced from cash or core bonds.

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Slide 17: Navigate uncertainty with BlackRock

Check out the full Advisor Outlook deck for more of our best thinking, and if you have any questions or want to talk about what any of these ideas mean for you, please reach out to your local BlackRock market team or call (877) ASK-1BLK. And last, please also click on the link to our new four-question survey! We would love to hear from you on your views and what you’d like to see featured in the Advisor Outlook. Thank you!