Higher bar for U.S. earnings to deliver
Market take
Weekly video_20240422
Beata Harasim
Opening frame: What’s driving markets? Market take
Camera frame
We saw 2024 as a year of two stories: First, cooling inflation and strong earnings would support upbeat risk appetite.
Next, inflation would rollercoaster back up and disrupt sentiment.
Title slide: Higher bar for U.S. earnings to deliver
Recent inflation data suggest inflation isn’t cooling as quickly as we expected, implying that the second phase may be happening now.
We think that raises the stakes for first quarter U.S. corporate earnings to support sentiment.
1: Inflation and interest rates
With heightened tensions in the Middle East, oil and commodity prices could be high for longer, reinforcing the new regime of hotter inflation and higher-for-longer interest rates.
Corporate earnings
Markets have cut their expectations for rate cuts in line with our view, and U.S. stocks have started to slid.
We question if that is a blip or a shift toward pricing in inflation and interest rates settling above the pre-pandemic levels.
We think tech companies have to deliver on high earnings expectations and other sectors have to post better results to sustain risk appetite.
3: Exploring the AI theme
We still prefer artificial intelligence (AI) beneficiaries.
We are eyeing [the] next wave of AI winners further up the technology stack.
We see AI adoption broadening into the healthcare, financials and communication services sectors where we see more room for productivity gains coming soon.
Outro: Here’s our Market take
We’re overweight U.S. stocks yet stay ready to pivot. We get selective in sectors favoring the AI theme.
Closing frame: Read details:
www.blackrock.com/weekly-commentary.
U.S. stocks have slid from their highs as inflation proves sticky and geopolitical tensions rise. We eye whether corporate earnings can keep buoying sentiment.
The S&P 500 slid 3% last week on jitters before key tech earnings results and rising bond yields. Geopolitical flare-ups are keeping oil prices elevated.
We look to this week’s U.S. PCE release for any signs of acceleration or stubborn services inflation. We see inflation and interest rates staying higher for longer.
We saw 2024 as a year of two stories. First, cooling inflation and solid corporate earnings would support upbeat risk appetite. And later, resurgent inflation would come into view and disrupt sentiment. We stay overweight U.S. stocks yet are ready to pivot. The second leg may be playing out now, reinforcing our expectations for persistently high inflation. That raises the stakes for Q1 corporate earnings to buoy sentiment, in our view, just as higher bond yields add pressure to equity valuations.
Market backdrop
The S&P 500 slid 3%, led by tech, on jitters before key earnings results this week and rising bond yields. The first direct strikes between Iran and Israel also helped stoke market unease. U.S. 10-year Treasury yields hit a new 2024 high of 4.70% before settling back slightly. Oil prices eased 4% last week after having been pushed higher due to geopolitical unrest in recent months. We think we’re in a world of structurally higher geopolitical risk – and a lower threshold for conflict escalation.
We’re watching this week’s release of March U.S. PCE data, the Federal Reserve’s preferred measure of inflation, for any signs of acceleration or stubborn services inflation. U.S. CPI data showed that core services inflation, excluding housing, ramped up in March – signaling that inflation may not fall as much as markets expected. Elsewhere, we don’t expect the Bank of Japan to hike rates. Markets will likely focus on its updated economic projections and CPI data.
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 April 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.
Global flash PMIs
U.S. durable goods; Japan services PPI
U.S. GDP data
U.S. PCE; Bank of Japan policy meeting; Japan CPI
Read our past weekly market commentaries here.
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