Against a backdrop of record-high US equities and low US bond yields, the US Federal Reserve has shifted towards easing policy rates, primarily driven by a cooler labour market.
In its latest Weekly Market Commentary, the asset manager stated that it maintains an overweight to US equities, and assuming that resilient activity continues and the labour market continues to slow, this should spur on further rate cuts.
The firm said it also sees value in locking in higher real yields, having closed a long-held underweight to long-term Treasuries as the Fed resumed cuts.
The report explained that US equities surged to fresh all-time highs in recent weeks, powered by the ongoing AI-driven tech rally that has buoyed global sentiment.
Meanwhile, as traders priced in two more quarter-point cuts by year-end and more than 100 basis points of easing by the end of 2026, the US dollar softened.
Nevertheless, BlackRock anticipates sustained growth (even with falling interest rates) due to resilient consumer demand and substantial AI-driven investment, contending that this outlook does not justify the extent of basis points currently factored in by the market.
It instead anticipates a modest, targeted rate cut cycle that supports risk assets without signalling deep recession.
Similarly, investment manager Ninety One argued that with the brakes pressing harder on the economy than first anticipated and the Fed now entering “risk-management mode”, this is acting as an inadvertent tailwind for markets.
Portfolio manager at the firm, Alex Holroyd-Jones, said that for risk assets in particular, the Fed’s easing pivot sends a powerful signal.
“A central bank that acknowledges policy is already restrictive and is prepared to cushion the downside creates a supportive environment for risk-taking,” Holroyd-Jones said.
Like BlackRock, he added that this makes a constructive backdrop for equities in growth-heavy sectors such as technology.
While both asset managers argued that this environment supports risk assets, others see the pivot as a warning sign.
For example, Talaria Capital recently urged investors to temper enthusiasm, warning that rate cuts can be a sign of prolonged economic weakness when driven by slowing growth rather than policy success.
To navigate the challenging period ahead, it recommended prioritising secure short-duration assets, real assets and companies with robust balance sheets, arguing that mega-cap tech stocks like Microsoft and Tesla can be risky investments.
Moreover, American Century’s co-chief investment officer of global growth and equity, Keith Lee, also recommended caution, suggesting that the market may be overestimating the Fed’s scope for aggressive easing without reigniting inflation.
“It’s important to remember the central bank has a dual mandate of maintaining full employment and price stability – and those goals appear to be at odds right now,” Lee said.
The firm’s CIO of fixed income, Charles Tan, added that the labour market may simply be normalising.
“In our view, lower job creation isn’t necessarily a reason to worry,” he said, arguing that even with a declining labour supply, a corresponding decrease in labour demand is restoring balance to the job market.
Going forward, the firm expects a slower, lower-conviction path, with Tan urging investors to keep their focus on long-term planning.
“The pace and size of the Fed’s rate cuts aren’t what determine long-term investing success. The most important thing is having a plan consistent with your goals and sticking to it,” he said.
Looking to the week ahead, BlackRock stated that with the US government shutdown delaying key economic data – including September payrolls – policymakers are deprived of crucial insights into the labour market.
For now, markets are instead relying on private indicators such as the ADP report and weekly jobless claims, which show moderation in hiring but no sharp decline – reinforcing expectations that for now, the Fed will continue cutting rates.
