After a solid start to the year, global equities markets have been plagued by an increasingly uncertain macroeconomic outlook.
Banking stress rattled markets earlier this year with investors fearing the worst following the collapse of three US banks and European giant Credit Suisse.
Confidence was slowly restored half-way through the year, prompting a strong equity market recovery. But this was short-lived.
Recent fears of a “higher for longer” monetary policy strategy to combat “sticky inflation”, and the flare up in geopolitical tensions in the Middle East, have undermined the outlook for corporate earnings.
The Dow Jones Index has slipped 0.6 per cent in the year-to-date and 3.1 per cent over the past month.
According to the latest analysis from global investment giant BlackRock, current macroeconomic conditions are “bad news for broad equities”.
“We think the current macro backdrop isn’t friendly for broad equity exposures,” BlackRock stated in an analysis published on Tuesday (24 October).
“Higher rates and stagnant growth have weighed on markets, but the move lower in stocks shows they are adjusting to the new macro regime.
“Stealth stagnation over the past 18 months – taking the average of GDP and gross domestic income, which adds up incomes and profits of households and firms – has been the weakest stretch ever seen outside a recession.”
BlackRock claimed stagnation has “gone under the radar”, given the resilience in household consumption, the labour market, and GDP.
“We see stagnation persisting as the Federal Reserve keeps policy rates high in its battle with inflation,” BlackRock continued.
“We think the inflation roller coaster we see ahead creates risks to corporate profit margins. Inflation is cooling now as the pandemic-driven mismatches in spending between goods and services normalise. That could also drag on corporate revenues as pricing power for some firms fades.”
Continued tightness in the labour market, BlackRock added, could also weigh on company profits if it places upward pressure on wages.
This would, in turn, force the Federal Reserve to keep policy rates higher for longer.
“We expect higher rates to increase the interest expense for companies. We think markets are underappreciating profit margin pressure – even if that takes some time,” BlackRock observed.
Given its assessment that broad equities “don’t fully reflect the macro damage” it expects, BlackRock has said it would remain stock selective.
This strategy, the firm said, would focus on “harnessing mega forces”, which it said included:
- Digital disruption (particularly developments in artificial intelligence).
- The “rewiring of globalisation underpinned by geopolitical developments.
- The transition to a low-carbon economy.
- Ageing populations.
- A fast-evolving financial system.
“The key is to identify the catalysts that can supercharge them and the likely beneficiaries – and whether all of this is priced in today.
“We think granularity is key to find the sectors and companies set to benefit from mega forces.”