Tech still likely to deliver on earnings
Market take
Weekly video_20240722
Wei Li
Opening frame: What’s driving markets? Market take
Camera frame
We’re witnessing some really powerful rotations in markets right now. You look at the catch-up of small cap, for example.
And the powerful rotation has been catalyzed by markets extrapolating recent macro trends.
For example, you look at the CPI, the surprise to the downside, that really brought back excitement of more cuts coming.
Title slide: Tech still likely to deliver on earnings
1: Staying cautious on macro
I would caution, however, against extrapolating near-term macro trends, because it's so uncertain in this new environment.
And yes, inflation is falling, but over the slightly longer horizon, you look at the structural forces – labor shortage, geopolitical fragmentation, greater fiscal spend and also the low-carbon transition – they are all pointing to inflation likely settling at a higher level compared to before.
And yes, we are likely heading into the first Fed cut in the cycle in September. We're still talking about an environment where rates are likely staying high for longer compared to pre-pandemic levels.
2: Focusing on fundamentals
And I continue to think that fundamentals and earnings prospects are key for deploying risk in equities.
And I would observe that through the course of the recent rotation – very powerful rotation – the fundamental and earnings prospects have not really changed.
Tech is still expected to deliver, year on year, earnings growth of 18% in this current earnings season. U.S. broad market: 9%. U.S. ex-tech: 2%.
3: Near-term volatility likely
For now, until the biggest event of the earnings season, Nvidia, which is taking place at the end of August, we could have some steam being let out – especially given recent rhetoric that is gaining traction. That is raising questions around return on investment for tech capex and also summer thin liquidity.
But I actually think that is healthy.
Outro: Here’s our Market take
I would be willing to lean into dislocations being created as we re-underwrite our conviction in the fundamental picture.
We think major tech firms can keep delivering on high corporate earnings expectations. We stay positive on stocks and the artificial intelligence theme.
U.S. stocks retreated last week, led by technology names. We expect some bouts of volatility ahead over the short term. Stocks of smaller-sized firms rose.
We’re eyeing how a surprisingly soft U.S. CPI report translates into PCE data. We think cooling inflation means the Fed can start cutting rates in coming months.
A tech-driven pullback has hit stocks this month as investors piled into segments like smaller companies on hopes for cooling inflation and Federal Reserve interest rate cuts. Looking through this near-term noise, we think tech will drive returns as consensus expects big tech companies to carry positive earnings results for the market. We see pullbacks as an opportunity to lean into stocks. We stay overweight the AI theme and U.S. stocks as we watch for the AI buildout to boost other sectors.
Market backdrop
U.S. stocks pulled back from record highs last week. Technology names led the retreat, driven by concerns over potentially stronger restrictions on semiconductor exports to China. A global IT outage stoked further unease. We expect some bouts of volatility ahead, as reflected in the surge in small cap shares. U.S. 10-year Treasury yields edged up on the week – showing that investors were not viewing this equity rotation and volatility as a pure risk-off episode, in our view.
We’re watching July U.S. PCE data – the Fed’s preferred inflation measure – to see if the decline in CPI services inflation is repeated. June saw core services inflation, excluding housing, fall for a second month straight. We think the recent slowdown in services inflation is not consistent with current wage gains. We still expect the Fed to cut rates in 2024, but to levels higher than pre-pandemic.
Week ahead
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 July 18, 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 U.S. dollars, and the rest in local currencies. Indexes or prices used are: spot Brent crude, ICE U.S. Dollar Index (DXY), spot gold, MSCI Emerging Markets Index, MSCI Europe Index, LSEG Datastream 10-year benchmark government bond index (U.S., 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.
Euro area consumer confidence
Global flash PMIs
U.S. GDP and durable goods data; Japan service PPI
U.S. core PCE; Tokyo CPI
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