Market insights

Weekly market commentary

25-Mar-2024
  • BlackRock Investment Institute

Why we stay risk-on in the short term

Market take

Weekly video_20240325

Wei Li

Opening frame: What’s driving markets? Market take

Camera frame

Last week was a big week for central banks and the key events worked out in favor of risk assets and we are dialing up risk-taking.

Title slide: Why we stay risk-on in the short term

1: US Federal Reserve

I’ll start from the Fed. They stopped [at] three cuts for this year in their dot plot, even as they revised up growth and inflations forecasts. And that very much green-lit risk assets and reinforced our view that the current positive sentiment while the bar is pretty high to disrupt that. We continue to like US equities and lean into AI as a theme.

2: Bank of Japan
Now moving to the Bank of Japan, it’s really quite an example of how to do something big in the most boring way. They hiked rates for the first time in seventeen years and markets liked it. They, in fact, alleviated some of our concerns around [a] policy mishap because: number one, they really framed out a normalization path rather than a policy tightening path; and number two, they didn’t really drop yield curve control despite what they said. They also said that in case of [a] rapid rise in long-term rates they would make swift adjustments, so they merely just relaxed the yield curve control which is quite positive for risk sentiment.

And this on top of positive earnings momentum, we’re looking at 12% earnings growth for this year as opposed to consensus of 6-8%. But we bring all of this together while further upgrading Japanese equities now three times in a row now. We’ve been upgrading it to the biggest single country overweight and from a whole portfolio perspective we are using already underweight in Japanese government bonds, we bring that to even more underweight to fund this upgrade of Japanese equities.

Now [the] Bank of Japan will be still more accommodative and still buy Japanese government bonds but from a total return perspective they really compare less favorably to other asset classes in this environment.

Outro: Here’s our Market take

We stay risk on we continue to like the US and Japanese equities. We think that there is still more room to go. But we are paying very close attention to inflation and earnings for any turn in momentum. But for now, we ride on.

Closing frame: Read details:

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In support of risk-taking

We see falling inflation, nearing interest rate cuts and solid corporate earnings supporting cheery risk sentiment. We tweak our tactical views and stay pro-risk.

Market backdrop

US stocks hit record highs last week and 10-year yields fell as the Fed stuck with planned rate cuts. Japanese stocks gained on a cautious BOJ policy pivot.

Week ahead

US PCE takes center stage this week. We see goods deflation pulling down overall US inflation for now before inflation resurges in 2025.

Central bank activity last week gave markets the thumbs up to stay upbeat. That keeps us pro-risk in our six- to 12-month tactical views as Q2 starts. We see stock markets looking through recent sticky US inflation and dwindling expectations of Fed rate cuts. Why? Inflation is volatile but falling, Fed rate cuts are on the way and corporate earnings are strong. We stay overweight US stocks but prepare to pivot if resurgent inflation spoils sentiment. We up our overweight on Japanese stocks.

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Broadening optimism

S&P 500 forward earnings expectations, 2019-2024

The red line in the chart shows earnings expectations remain high for tech companies, many of which markets see leveraging artificial intelligence. Yet the green line shows earnings strength is starting to broaden into most other sectors.

Forward looking estimates may not come to pass. 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, March 2024. Notes: The chart shows 12-month forward earnings expectations for the overall S&P 500 index and S&P 500 information technology stocks.

As Q2 kicks off, we still see a more supportive near-term backdrop for risk-taking. US inflation has eased from its pandemic highs and growth has held up. And expectations for S&P 500 earnings growth for 2024 have been revised up to about 11%, LSEG data show. Earnings expectations are even higher for tech companies that markets see leveraging artificial intelligence (AI). See the orange line in the chart. Earnings expectations for the broader market are also on the mend (green line), with sectors except commodities and healthcare seeing earnings recover. Plus, the Federal Reserve reaffirmed its intention to make three quarter-point rate cuts this year, while lifting its growth and inflation forecasts. After the recent Fed signals, we believe the bar is high for market pricing of immaculate disinflation – inflation falling near the Fed’s 2% target while growth holds up – to be challenged.

Against that backdrop, we remain tactically overweight US stocks. We think upbeat risk appetite can broaden out beyond tech as more sectors adopt AI, and as market confidence is buoyed by recent Fed messaging and broadly falling inflation. We still prefer the AI theme even as valuations soar for some tech names. Stock valuations are supported by improving earnings, with the tech sector expected to account for half of this year’s S&P 500 earnings, Bloomberg data show. That has led to a fall in price-to-earnings ratios – share price divided by earnings per share – for some companies, unlike in the dot-com bubble when they soared. To compare the periods, BlackRock’s systematic equities team analyzed 400 metrics related to valuations and other features and found that the number flashing red now is 50% lower than when the dot-com bubble burst in 2000.

Potential disruptions to our view

What would change our risk-on stance? First, risk appetite being challenged as markets shift focus from cooling inflation to inflation on a rollercoaster back up in 2025. We think it will settle closer to 3% as high wage growth keeps services inflation sticky. Persistent inflation pressures from mega forces, or big structural shifts we see driving returns, also call for a higher neutral rate – the interest rate that neither stokes nor limits economic activity – than in the past. We think the Fed’s nudged-up long-run policy forecasts are starting to reflect our view of rates staying higher for longer than pre-pandemic. Markets are not eyeing that outlook for now. Second, stocks could grow more sensitive to macro news as profit margin pressures mount.

As Q2 kicks off, Japanese equities become our highest-conviction tactical view as solid corporate earnings and shareholder-friendly reforms keep playing out. We add to our overweight because we think the Bank of Japan policy stance is supportive of local markets. The BOJ made clear that ending negative rates is about normalising policy, not anxiety over inflation, and it pledged to limit spikes in long-term yields. We think the BOJ will act cautiously and not sabotage the return of mild inflation. We also up euro area inflation-liked bonds to neutral as market expectations for persistent inflation have eased.

Our bottom line

We see a supportive risk-taking environment for now, as inflation keeps falling and after the Fed reinforced upbeat sentiment. We stay overweight US stocks and the AI theme. We go further overweight Japanese stocks.

Market backdrop

US stocks climbed to all-time highs last week and US 10-year Treasury yields slipped after the Fed stuck to its plans to cut policy rates three times this year even after lifting both its growth and inflation forecasts for this year. We think markets are underappreciating another change: the Fed nudging up its long-run policy rate. Japan’s Nikkei stock index hit all-time highs after the BOJ ended negative rates and lifted its yield cap. Yields on Japanese 10-year government bonds dipped slightly.

This week, we focus on US PCE data, the Fed’s preferred measure of inflation. We think US inflation can fall further toward 2% this year due to falling goods prices. Yet we see inflation on a rollercoaster back up in 2025, with inflation eventually settling closer to 3%. The Fed appears to be slowly adjusting to this view given its higher projections for policy rates two years out.

Week ahead

The chart shows that U.S. equities are the best performing asset year-to-date among a selected group of assets, while the German 10-year Bund is the worst.

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 March 21, 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.

March 26

US consumer confidence and durable goods; UK GDP; Japan services PPI

March 29

US PCE

March 31

China manufacturing PMI

Read our past weekly commentaries here.

Big calls

Our highest conviction views on tactical (6-12 month) and strategic (long-term) horizons, March 2024

Note: Views are from a US dollar perspective, March 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, March 2024.

Legend Granular

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.

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, March 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, March 2024.

Legend Granular

Asset Tactical view Commentary
Equities    
 Europe ex UK Europe ex-UK: tactical Underweight -1 We are underweight in a whole portfolio context. Valuations are attractive, but the near-term growth and earnings picture remains less convincing than in the US and Japan, in our view.
Germany Germany: tactical neutral0-1 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 France: tactical Underweight -1 We are underweight. Relatively richer valuations offset the positive impact from past productivity enhancing reforms and favorable energy mix.
Italy Italy: tactical Underweight -1 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 Spain: tactical neutral0-1 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 Netherlands: tactical Underweight -1 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 Switzerland: tactical Underweight 11 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 UK: tactical neutral 00 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 Euro area government bonds: tactical neutral 00 We are neutral. Market pricing reflects policy rates broadly in line with our expectations and 10-year yields are off their highs.
German bunds German bunds: tactical neutral 00 We are neutral. Market pricing reflects policy rates broadly in line with our expectations and 10-year yields are off their highs.
French OATs French OATs: tactical neutral 00 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 Italian BTPs: tactical Neutral 0 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 UK gilts: tactical neutral 00 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 Swiss government bonds: tactical neutral 00 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 Euro area inflation-lined bonds: tactical neutral0-1 We are neutral. Market expectations for persistent inflation in the euro area have come down.
European investment grade credit European investment grade credit: tactical Neutral We are neutral. We maintain our preference for European investment grade over the US given more attractive valuations amid decent income.
European high yield European high yield: tactical Overweight +1 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, March 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
Wei Li
Global Chief Investment Strategist – BlackRock Investment Institute
Natalie Gill
Portfolio Strategist – BlackRock Investment Institute
Beata Harasim
Senior Investment Strategist — BlackRock Investment Institute
Yuichi Chiguchi
Head of Multi-Asset Strategies & Solutions and Chief Investment Strategist in Japan – BlackRock

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