Long in the overweight camp, BlackRock now sees American risk assets being pulled in two directions.
On the one hand, corporate earnings have proved robust. Q2 US earnings are up about 8 per cent year-over-year, even with tariffs, according to LSEG data.
The results suggest AI investment is a winning formula, with US profit margins at record highs relative to the flat margins seen in Europe. Microsoft and Meta’s impressive performances last week also proved as much.
“We think US corporate strength could cushion the blow and stay overweight the AI theme and US stocks,” it said.
At the same time, in its latest weekly market commentary, BlackRock conceded that the full impact of the tariffs has still yet to be felt, and it remains unclear who will bear the cost.
Although recent trade agreements have offered some much-needed clarity, the reality is that rates are significantly higher than at the end of 2024, with US tariffs on imports now settling at an effective rate around 15 to 20 per cent, according to US Treasury data.
So far, the tariff impact on American consumers has been slow to materialise, which BlackRock attributed partly to companies expediting imports in anticipation of tariffs.
“Yet that offset is fading: second quarter US inflation data showed durable goods prices rising at the fastest pace since 1991 outside the pandemic,” BlackRock said.
And with tariffs generating revenues of US$27 billion in June, it added that it means someone is already paying, and the extent to which tariffs hurt growth and stoke inflation depends on who that is.
Right now, BlackRock said it is a mix of foreign suppliers, US companies and consumers fronting the cost.
It pointed to automakers to illustrate the complexity of the tariff situation and why, in their view, corporate earnings resilience is crucial.
Given their position as manufacturers within the industrial sector, automakers are deeply embedded in the global supply chain, making them highly susceptible to the significant effects of tariffs.
However, as BlackRock pointed out, the industrials sector is the best-performing S&P 500 sector this year – up about 15 per cent compared with 6 per cent for the index, according to LSEG data.
BlackRock attributed this result to the way industrials benefit from several key themes driven by mega forces: the AI buildout, geopolitical fragmentation and the boost to defence spending this year.
“That’s why this environment favours getting granular with views below the sector level and favours an active approach to achieving returns,” it said.
As companies and consumers each eat tariff costs, it advised investors to get granular views on the situation as it continues to play out.
Looking forward, BlackRock anticipated that upcoming US trade data will provide further clarity on the impact of tariffs on imports.
