BlackRock’s Monthly Market Outlook for Financial Advisors

00:00

Cover

Hi, I am Carolyn Barnette, Head of BlackRock Market and Portfolio Insights for U.S. Wealth team, here with your July Advisor Outlook update.

00:10

Slide 3: July key takeaways

I see three key things driving portfolio construction decisions this month:

First, high interest rates are continuing to drive dispersion in markets, creating investing opportunities for income-seekers and cash plus alternative strategies, but also creating challenges for smaller companies borrowing at elevated rates.

We are doubling down on the quality and growth stocks that have been resilient – or even, relatively un-impacted – by high interest rates, and are seeing growing opportunities in companies that can profit off of AI.

Overall, our positive economic outlook leads us to overweight risk assets – stocks over bonds, and credit within bond sleeves – though valuations suggest taking an active approach to stock and credit selection.

00:54

Slide 4: Slow progress on inflation may keep rates high

Inflation has been decelerating, with a surprisingly low reading in May showing a 0% month-over-month headline CPI. Core inflation is making its way down, though its path has been bumpy… and the Fed is waiting for a sustained move downward before cutting rates.

In fact, the Fed revised its interest rate expectations at its June meeting, with the median forecast suggesting just one interest rate cut in 2024. While the three cuts originally forecast in March now seem unlikely, we think two could still be on the table if inflation continues falling.

Regardless of whether the Fed cuts zero times, or once, or twice, though, interest rates will remain in restrictive territory through the rest of the year. A pivoting Fed should provide support for stocks and bonds, but even 50 bps of cuts may not provide much relief for the companies sensitive to high interesting rates.

01:47

Slide 5: The U.S. economy has remained resilient

Making it easier for the Fed to potentially cut rates later this year is that economic growth appears to be moderating alongside inflation. Projections remain positive, though, keeping us well outside of recession territory – and while growth earnings are projected to continue driving the bulk of S&P 500 earnings growth, value is projected to start catching up.

We continue to overweight quality and growth stocks for now, but also see select opportunities within value – and in particular, quality companies trading at a reasonable price.

02:20

Slide 9: Growth and tech stocks continue to deliver

Technology stocks in particular have continued to deliver – while many of the S&P 500 stocks have delivered negative earnings growth over the past few quarters, tech earnings have continued to grow.

Interestingly enough, though, most advisors are underweight both growth and tech stocks relative to the S&P 500. Part of this comes from international equity allocations that are more value-oriented, and part comes from an overweight to small caps… since both have lower allocations to tech than the S&P.

But my guess is that many advisors are also pegging allocations to what the S&P 500 used to look like, rather than what it looks like today – the S&P 500 is now 43% growth and 39% tech+, a huge shift from what it looked like from 10 years ago, and that is left advisors 10% underweight each category.

03:11

Slide 10: AI investment opportunities transcend the mag-7

So while we continue to overweight the large tech companies that have made headlines, we are also looking to some of the additional beneficiaries of AI beyond Nvidia… most notably, we are seeing opportunities in the infrastructure build-out that will need to happen to support higher computing power needs. We are looking here at utilities, energy, and infrastructure companies in addition to the semiconductor producers that have already done well.

03:35

Slide 11: Take an active approach to credit selection

We have heard a lot of advisors ask about valuations… not surprising as the S&P 500 hits all-time-highs and credit spreads trade at historic tights. We do believe that these valuations are warranted, and that the AI-related stocks in particular could still have room to run.

On the credit side, we believe that tight spreads are reflecting positive economic conditions and a high yield sector that has come up in quality as traditional lending standards have gotten tighter. High absolute yields remain attractive, and credit has actually historically done well when spreads are tight, delivering positive returns 79% of the time and 10+% returns 31% of the time. We do not expect spreads to tighten further from here, but expect credit to deliver returns roughly in line with their yields.

04:22

Slide 6: Our best portfolio implementation ideas for today

Putting it all together, here are our best portfolio implementation ideas for today is environment.

High interest rates lead us to prefer quality large caps over small caps, and continue to support an allocation to cash plus alternatives sourced from cash or longer-dated bonds. The combination of high rates and a positive growth outlook lead us to double down on quality and growth stocks, and AI-related stocks in particular. While this overweight could be sourced from cash or bonds, if you are already overweight stocks you could also source from European stocks or a value or small cap allocation. And last, we are leaning into risk assets across the board, including an overweight to plus sector bonds within fixed income, sourced from cash or longer-dated bonds. And, we see opportunity in private equity over small caps, as companies have been going public later in their growth cycle.

05:12

Slide 16: 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 would like to see featured in the Advisor Outlook. Thank you!