I’m Carolyn Barnette, here with your Advisor Outlook update for May.
The big questions this month continue to center around the potential impacts of trade policy. So I’ll talk a little about our outlook here, as well as what it might mean for advisor portfolios.
We’ve already seen U.S. growth estimates revised down, and inflation estimates revised up. Q1 data showed that U.S. GDP contracted for the first time since Q1 of 2022, and we have seen full-year estimates revised down as well. The IMF recently downgraded U.S. growth expectations by nearly a full percentage point, and our Fundamental Fixed Income economist team expects 0% real GDP growth in 2025. Analysts have been lowering earnings expectations as well, with Bloomberg Intelligence suggesting Q2 earnings growth that could be 43% lower versus expectations at the start of the year.
Complicating the Federal Reserve’s job, inflation has proved persistent. Our FFI team is forecasting core PCE to rise to 3.8% by the end of the year, which is well ahead the Fed’s 2% target.
So perhaps, given all of that, it shouldn’t come as a surprise that markets have swung rapidly through April. But the good news, for long-term investors, is that many of the sharpest declines have been followed by recoveries. With so many trade policy negotiations still in flux, and the impact of future tax cuts and deregulation still-to-be-determined, staying invested could continue to be critical.
That said, diversification is more important than ever, though. We’ve seen the “Magnificent 7” pull back meaningfully this year, and the smaller cap securities that many advisors chose to diversify the S&P 500’s concentration risk have pulled back right alongside them.
International equities, on the other hand, have been a bright spot. And with lower volatility and a lower correlation to U.S. large caps than small caps, International could continue to provide valuable diversification to U.S. market swings.
And if we go further on the theme of diversification… uncertainty around the path of inflation, federal deficits, and international buying interest has driven longer-term treasuries to swing this year. Bond market volatility is nothing new, since we’ve been living through it for the past few years, and our view is that it is important to diversify your diversifiers as well.
Strategies with low correlations to stocks and bonds can be particularly valuable in today’s environment of volatility across both traditional asset classes, as can an active approach to curve positioning and building in inflation protection through assets like TIPS and gold.
If I were to sum up everything we’re thinking into portfolio implications for today:
-First and foremost, consider lower beta strategies to stay invested while managing downside participation through volatile markets. And don’t limit yourself to U.S. assets: quality international stocks may provide better diversification than smaller cap U.S. stocks.
-Stay flexible, or hire active managers who can be flexible on your behalf: Markets are moving quickly, which can create opportunity. We’ve seen this in both stock and bond markets, with individual security dispersion, widening spreads, and changing term premia all potential areas for skilled managers to capitalize on.
-And last, diversify your portfolio diversifiers. Alternatives may be able to offset stock and bond market volatility, providing ballast when you need it most.
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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