Winning the Points That Matter When Investing

Winning the Points That Matter

In 17 years, Rafael Nadal won 14 French Open titles during which he won 112 of 115 matches (97.4% win-rate), 90% of all sets, and 89% of all games within those matches. But he only won 55% of the points played. The secret? Winning the important points.

Investing is not so different. On any given day, markets go through ups and downs as the news ebbs and flows; your win rate can hover around ~50% day-to-day. Equities show the same symmetry. Since March 9, 2009, the equity market is up 1200% even though it has been up only 55% of the days along the way. Over time, consistent execution and sharp regime recognition allow you to stay in the game and win the important points, the ones that ultimately drive returns.

The important points today:

1. The Labor Market is More Vulnerable than it Appears

The labor market is showing early signs of strain. The share of industries hiring has dipped below 50%. In fact, excluding healthcare, job growth has turned negative for the first time in 25 years outside of a recession. Substantial downward revisions have plagued jobs reports for three years, revealing the labor market has been more fragile than it appeared for some time. This month, we had another -911k revision to the prior year’s job growth, wiping out about half of the jobs that were initially reported.

2. Inflation is on a Path of Moderation

Tariffs have reemerged as a source of some noise in headline inflation, particularly across goods. We expect more of this impact to be passed through to consumers, as importers adjust pricing to offset higher input costs—reinforcing inflationary pressures in the near term. However, stepping back, underlying core inflation is following a steady downward trend. The market pricing of inflation forwards affirms that tariff-induced price increases are a one-time price level shift, not triggers for runaway inflation. Meanwhile, Core CPI volatility looks more like the stable 1990–2020 era than the post-COVID shocks. The Fed’s mandate is price stability—not 2% at all costs.

3. Growth: Resilience with a Productivity Kick

The US Economy continues to display incredible resilience. Q2 GDP was revised higher, with domestic final private purchases up +0.7pp, signaling a steady ~2% real growth economy. In addition to steady consumption, the economy continues to be amazingly well supported by surging intellectual property and software investment.

4. Margins Keep Rising, Even as Revenues Slow

Corporate America is doing more with less. In Q2, S&P 500 revenue growth slowed to 5%, but earnings per share surged 12% year-over-year, driven by cost-cutting, automation, and process optimization. Profit margins are pressing to new highs—even as the topline slows. Companies are finding deeper cost savings without mass layoffs, signaling that efficiency—not austerity— is driving earnings.

5. AI is Changing the Ecosystem in Dramatic Ways Today

Since 2023, early-career workers in the most AI-exposed fields have experienced a 13% decline in employment. And yet, companies are getting more efficient—many reporting productivity boosts of 15–30%. While there is ample talk of investment for the future, AI is already having an impact today. This creates 1) downside risk to labor markets, 2) upside influence on growth and productivity, and 3) downside pressure on inflation.

6. The Aggregate Economy Is Strong. But Dispersion Is Extreme.

In aggregate, Households are in great shape, with net worth near all-time highs and debt near historic lows. But the aggregate masks a more nuanced reality under the surface. The bottom 50% of households are struggling under the pressure of high rates today. This cohort has more high-interest non-mortgage debt than liquid assets and now faces weaker wage growth as the job market softens. They did see home equity gains that could theoretically help address these liquidity challenges, but they can't access that wealth, as home equity loan rates also remain prohibitively high.

7. The Rate-Sensitive Housing Market Remains Structurally Challenged

High rates have also resulted in a housing market stagnation. Affordability is near record lows - the income required to buy a median home has more than doubled since 2019. Activity has all but frozen. Builder confidence has collapsed to levels last seen after the Global Financial Crisis, and the pipeline of new supply is slowing fast, while the total population continues to grow– the opposite of what would improve affordability.

8. Corporates Are Built to Withstand High Rates. Small Businesses Aren’t.

Benefiting from a decade of historically low interest rates, large corporations strategically termed out debt, reduced leverage, and accumulated cash reserves. Today, many have transitioned from net borrowers to net creditors—now earning over $8 billion in interest income and positioning themselves to capitalize on the current high-rate environment. As a result, the top 7 companies in the S&P 500 control over 30% of EBITDA, free cash flow, and cash—but hold just 7% of total index debt. On the other hand, small businesses are struggling under the weight of higher borrowing costs, creating a disproportionate drag on employment.

9. Investment in Capex and R&D Continues to be Robust

The process of investing CAPEX + R&D, building efficiencies, and generating cash flow, is a virtuous cycle that is increasingly independent to the risk-free-rate cycle… This cycle should continue to compound as we move into a new era of expansion—driven by structural investment, technological reinvention, and accelerating productivity.

10. Fed Policy: a New Playbook Ahead

The future Fed could very well consider utilizing a wider set of policy tools which together could create much greater economic and labor velocity. Meanwhile, what was once a struggle to lift (then contain) inflation could transition into a struggle to lift employment going forward. With the Fed now operating in a reduced balance sheet environment, leveraging both interest rates and liquidity, may position itself for greater policy flexibility—potentially shifting toward a lower real rate narrative that reflects a renewed emphasis on strong job creation.

Positioning for today’s environment

Fixed Income: Stay on the Line
When high-grade bonds cover a meaningful share of a portfolio’s required return, the need for hedges can fall away. Today, income-oriented allocations have the potential to play defense and offense at the same time and the current yield profile allows investors to play effective offense. While starting yield remains as the single best predictor of forward returns, the front end has spent 10% of the last 20 years at current yield levels. A 6%+ yield on investment-grade-rated fixed income with <3% volatility is one of the most compelling setups in over a decade. This high-quality, diversified, income-oriented posture makes for an opportune liquid ballast for portfolios, letting investors look through the noise and win over time.

Equities: Compounding Machines with Record ROEs

On the other hand, headline P/E is a weak guide to forward equity returns. The P/E contribution of the largest stocks has risen in recent years, not because of multiple expansion—but because of exploding earnings. US corporates are compounding ROE at historically high rates, far above historical norm. These aren’t just tech stocks—they’re cash-flow compounding engines with reinvestment flywheels and fortress balance sheets. We continue to see an incredibly exciting opportunity to lean into durable cash-flow growth and invest alongside generationally exciting profitability.

Investing Like Nadal: Win the key points. Win the Match.

Like Nadal at Roland Garros, investors don’t need to win every day. Rather, they just need to get the important points right, look through the noise, and let their strategy work over the medium term. Today, those points include a moderating inflation trend, resilient (if uneven) growth, AI’s transformative productivity, and the extraordinary yields still available in fixed income.

The lesson? Stay on the line. Lean into quality, diversified income as a liquid ballast for portfolios. Capture the fast rivers of equity cash flow. And diversify with hard assets and privates. Taken altogether, it is one of the most exciting environments for investing in decades.

Investing involves risks, including possible loss of principal. Past performance is no guarantee of future results. Index performance is shown for illustrative purposes only. It is not possible to invest directly in an index.

Performance data quoted represents past performance and is no guarantee of future results. Investment returns and principal values may fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. All returns assume reinvestment of dividends and capital gains. Current performance may be lower or higher than that shown. Refer to blackrock.com for most recent month-end performance.

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The Morningstar Rating for funds, or "star rating", is calculated for managed products (including mutual funds, variable annuity and variable life subaccounts, exchange-traded funds, closed-end funds, and separate accounts) with at least a three-year history. Exchange-traded funds and open-ended mutual funds are considered a single population for comparative purposes. It is calculated based on a Morningstar Risk-Adjusted Return measure (excluding any applicable sales charges) that accounts for variation in a managed product's monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance. The top 10% of products in each product category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. The Overall Morningstar Rating for a managed product is derived from a weighted average of the performance figures associated with its three-, five-, and 10-year 60-119 months of total returns, and 50% 10-year rating/30% five-year rating/20% three-year rating for 120 or more months of total returns. While the 10-year overall star rating formula seems to give the most weight to the 10-year period, the most recent three-year period actually has the greatest impact because it is included in all three rating periods.