Market insights

Weekly market commentary

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: U.S. 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 U.S. 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 U.S. 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:

www.blackrock.com/weekly-commentary

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

U.S. 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

U.S. PCE takes center stage this week. We see goods deflation pulling down overall U.S. 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 U.S. 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 U.S. 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. U.S. 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 U.S. 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 normalizing 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 U.S. stocks and the AI theme. We go further overweight Japanese stocks.

Market backdrop

U.S. stocks climbed to all-time highs last week and U.S. 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 U.S. PCE data, the Fed’s preferred measure of inflation. We think U.S. 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 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.

March 26

U.S. consumer confidence and durable goods; UK GDP; Japan services PPI

March 29

U.S. PCE

March 31

China manufacturing PMI

Read our past weekly market commentaries here.

 

Big calls

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

  Reasons
Tactical  
U.S. equities Our macro view has us neutral at the benchmark level. But the AI theme and its potential to generate alpha – or above-benchmark returns – push us to be overweight overall.
Income in fixed income The income cushion bonds provide has increased across the board in a higher rate environment. We like short-term bonds and are now neutral long-term U.S. Treasuries as we see two-way risks ahead.
Geographic granularity We favor getting granular by geography and like Japan equities in DM. Within EM, we like India and Mexico as beneficiaries of mega forces even as relative valuations appear rich.
Strategic  
Private credit We think private credit is going to earn lending share as banks retreat – and at attractive returns relative to credit risk.
Inflation-linked bonds We see inflation staying closer to 3% in the new regime on a strategic horizon.
Short- and medium-term bonds We overall prefer short-term bonds over the long term. That’s due to more uncertain and volatile inflation, heightened bond market volatility and weaker investor demand.

Note: Views are from a U.S. 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 U.S. 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

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.

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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