I’m Carolyn Barnette, here with your Advisor Outlook update for June.
There’s no shortage of things to talk about for today’s markets: trade policy, tax policy, stock market valuations, bond market performance…
Here’s what you need to know:
Recession odds – and market performance – have closely tracked the estimated effective tariff rate. Easing trade tensions with China have reduced some of the tail risks we were worried about, and the current rates being negotiated suggest we could see most tariffs come in between 10-30%.
We’re less bullish than we were at the start of the year, but also less bearish than we were in early April. Our current estimates suggest real GDP growth that will come in positive for the year, but well slower than 2024, and inflation that could be sticky at 3.1%.
With inflation projected to stay high, we are not expecting many rate cuts from the Fed this year, barring a weakening in the labor market, and in fact the market isn’t projecting a first cut until October.
This – in combination with projections for an increasing deficit – has put a lot of pressure on longer-term bonds. We’ve been talking about the importance of curve positioning for a long time, and this year’s performance really illustrates the benefit of being active here: the broad treasury index is up 2% YTD, but 20+ year bonds have lost money. Our view is that these factors will continue to put pressure on long bonds, so we prefer the short-to-intermediate part of the curve and diversifying into credit, alternatives and international bonds.
On the equity side, we are grappling with the trade-offs between a more optimistic outlook and markets that may already be pricing in that optimism. Most sectors have recovered from early losses, but the bulk of their price appreciation has been an increase in valuations. We are starting to see earnings revision momentum turn positive, but there is much that remains unknown at this point. Our Target Allocation model portfolios team recently rebalanced their portfolios, and lowered their equity overweight to reflect this uncertainty: we are still constructive on equities, but seeing an opportunity to take some chips off the table.
Our investment platform continues to prefer large caps over small caps: small caps’ greater sensitivity to interest rates could challenge performance, since we expect rates to remain relatively high, and their greater sensitivity to economic slowdowns means that they might still struggle if rising recession concerns prompt the Fed to cut rates meaningfully.
The challenge: many advisors may not be positioned for today’s markets. Three big bets we’ve observed: an overweight to small caps, an underweight to international equities, and an overweight to cash and ultra-short bonds. These bets – particularly on the stock side – may have caused advisors to miss out on double-digit return differentials.
Looking forward:
• Our asset allocation teams are overweighting larger cap stocks in the U.S. and abroad, creating opportunity for those still overweight small caps to consider swapping for high quality international exposure.
• We’re also leaning into active strategies that can capitalize on dispersion: stock dispersion on the equity side and curve positioning and credit selection on the bond side.
• Pressure on long bonds continues to suggest additional forms of diversification: we like liquid alternatives and international bonds.
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 you can call 877-ASK-1BLK.
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