“We saw 2024 as a year of two stories. First, subdued inflation and strong corporate earnings would support upward risk appetite. Then, we saw a resurgence in inflation, which dampened sentiment. It will be disruptive. We remain overweight in US equities but are prepared to change direction. The second leg is now underway as rising bond yields put pressure on equity valuations. “We believe this is likely to be the case, reinforcing expectations for continued high inflation and increasing expectations for first-quarter corporate earnings, driving sentiment higher.”
This is how BlackRock analysts explain current market conditions in their weekly commentary.
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The report said, “We had expected inflation to ride a roller coaster as resistance from falling prices waned and solid wage growth would keep services inflation steady.However, core services inflation rose in March. “This indicates that inflation is persistent,” the report said.
“A further escalation of tensions in the Middle East could keep oil prices high, further fueling higher inflation, and potentially pushing interest rates higher for an extended period of time. “The Bank has cut its forecast for less than two rate cuts this year (green line in the chart), consistent with our view,” they added.
According to BlackRock's comments, “The Fed has gone from celebrating market expectations that inflation will fall to 2% without hurting growth to suggesting it may need to tighten policy. The S&P 500 price-to-earnings ratio, a popular valuation indicator, shows that stocks are feeling the recession.'' Will the heat from rising interest rates (orange line) help companies continue to meet high profit forecasts? , we think that's why it's even more important to continue to outperform. ”
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“We are questioning whether the decline in stocks is temporary or a major shift toward pricing in inflation and interest rates settling at higher levels than pre-pandemic levels. We remain overweight in US equities in our strategic horizon, but are prepared to change direction given the uncertainty,'' the experts stressed.
“We have broadened our view of equities to include segments of the market with improving earnings growth prospects, and are focusing on small-cap stocks where earnings are at greater risk from rising interest rates.”This week, Earnings face significant challenges in some mega-cap stocks.'' Tech stocks hit earnings expectations, other sectors show earnings recovery as tech stocks come under pressure and interest rate cut hopes fade The hurdles have become higher, and it is thought that there is a possibility of a rise in inflation and a change in profits. “In our view,” they added.
Bet on AI
“We still hope for a structural shift in which the beneficiaries of artificial intelligence (AI) leverage the enormous power of AI and digital disruption to drive current and future benefits,” the analysts said. says. In 2023,” they added.
“That view paid off, with some valuations exceeding historical averages.As AI adoption widens, we continue to see potential winners further up the technology stack needed to develop AI applications.” ” says BlackRock.
“Healthcare, financials, and communications services are among our favorite sectors because they have a lot of scope for productivity growth. Outside of technology, these sectors are the ones that feature AI-related keywords in earnings calls and company filings. mentions of AI in non-tech sectors have jumped 250% since 2022, according to research from BlackRock's Systematic Equity team.
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“Bottom line: This week's U.S. earnings update will be key to determining whether we can continue to beat expectations and increase risk appetite in a prolonged high interest rate environment.We are overweight U.S. equities. “We expect the AI theme to expand further,” the analysts warned. .
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