Asset Manager Cites Improving Economic Indicators
BlackRock, the world’s largest asset manager, upgraded its view on US stocks to overweight from neutral this week, citing expectations that the Federal Reserve will engineer a soft landing for the economy.
The firm’s Investment Institute said recent data suggests the Fed’s aggressive interest rate hikes in 2022 have started slowing demand and easing inflationary pressures without severely impacting employment. This has increased hopes that the central bank can tame inflation while avoiding a recession.
“We upgrade U.S. equities to overweight as we expect the S&P 500 index to end the year around 8% higher than current levels,” BlackRock said.
The asset manager highlighted declining energy and goods prices, easing supply chain constraints, slowing job growth, and falling housing activity as signs that economic demand is moderating. This could allow the Fed to slow or even pause its tightening cycle in the coming months.
Risks Remain But Recession Odds Have Fallen
While risks such as geopolitical tensions and further Fed policy errors remain, BlackRock believes the odds of a soft landing have increased substantially. The firm cited its proprietary AI models which scour economic, market and geopolitical data, as part of its justification.
“The AI identifies a model-driven rally in U.S. equities that may broaden in the next six to 12 months if inflation declines in a ‘soft landing’ for markets,” BlackRock said.
As such, the asset manager has turned bullish on US large cap growth stocks, which were hit hard in 2022 as rates rose sharply. High valuation growth companies are seen as biggest beneficiaries if inflation continues to ease back toward the Fed’s 2% target.
BlackRock equity strategist Wei Li said in a note: “This offers opportunities, in our view, especially for quality large-cap growth companies that can deliver earnings stability and pricing power.”
The table below outlines BlackRock’s upgraded sector recommendations:
| Sector | New Recommendation | Key Rationale |
|---|---|---|
| Information Technology | Overweight | Beneficiary of declining long-term rates |
| Healthcare | Overweight | Defensive characteristics, earnings stability |
| Communication Services | Market Weight | Select opportunities but headwinds remain |
| Consumer Discretionary | Underweight | Pressure from higher rates, input costs |
| Materials | Market Weight | Income over capital growth |
| Real Estate | Underweight | Rate sensitivity |
(Table summarizing BlackRock’s key sector calls in its latest strategy outlook)
Fed Still Has More Work But Pieces for Soft Landing Falling Into Place
The asset manager acknowledged that inflation remains well above the Fed’s target and there are still risks of another leg higher in prices. As such, further interest rate increases are likely needed to get inflation back to 2%.
However, BlackRock believes the cumulative tightening delivered so far means the Fed can slow the pace of hikes, pausing later this year to assess the impacts.
“This would allow it to guide policy more in line with the lagged impacts of tightening,” said Wei Li.
JPMorgan CEO Jamie Dimon, head of the largest US bank, added to the hopes this week with positive comments on the economy. He said inflation and rates have peaked, consumer balance sheets remain strong, and he expects a mild to moderate recession at worst.
If these expectations play out, BlackRock believes US stocks could rally strongly from current oversold levels. This is based on analysis from the firm’s AI models and earning estimates that see double-digit upside for equity indices.
“Equity valuations price in a 73% chance of recession, an outlier versus history. Some investor pessimism is warranted, but potentially overdone,” BlackRock concluded.
Geopolitical Wildcards Remain With Ukraine War Ongoing
The BlackRock Investment Institute did caution that major geopolitical events like an escalation of Russia’s invasion of Ukraine could easily flip the odds back towards a harder landing.
A key watchpoint remains energy prices and any supply disruptions that could re-accelerate inflation. So while the base case is now for a soft landing, the asset manager stressed investors should be prepared tactically for sudden market moves in either direction.
“The path-dependent outcomes, non-linearity and complexity of market drivers call for tactical readiness to pivot,” said the firm’s chief investment officers.
This means keeping balanced exposures across asset classes and maintaining crisis hedges until economic conditions show further sustained improvement.
BlackRock believes volatility could remain high in the interim period as investors swing between hopes and fears on landing scenarios. This could create attractive opportunities for nimble investors able to buy the dips.
With its unrivaled scale and access to market data flows, BlackRock is well positioned to capitalize on these moves through proprietary AI and trading algorithms. The messaging in this week’s outlook upgrade suggests we may see more bullish trading activity from the asset giant as it maneuvers to increase US stock holdings.
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