The S&P 500 has fallen roughly 8 per cent from its February peak and is down 4 per cent year to date, as investor fears mount over US policy shifts potentially weighing on economic growth.
Amid market unease over the outlook for US growth and the tech sector, BlackRock has flagged a “double disconnect”, noting that while economic conditions don’t currently signal a recession, lingering policy uncertainty could still dampen growth.
“Fundamental, quantitative economic data doesn’t indicate a downturn is near. Job gains have slowed since 2022 but remain above the long-term level we expect given an ageing workforce … US corporate earnings expectations and high-frequency indicators of consumer health like weekly credit card spending are also solid,” BlackRock unpacked in a market note this week.
“Yet near-term risks to growth loom: uncertainty could hit consumer spending, investment and trade. The longer policy uncertainty lasts, the more growth could suffer.”
However, BlackRock expects uncertainty to ease within six to 12 months and remains overweight on US equities.
“Earnings expectations are healthy, with 12 per cent growth forecast for the S&P 500 this year versus 14 per cent,” the firm said.
“Tech corporate margins, earnings and revenues forecasts are holding up and the sector still has the fastest expected growth this year. Free cash flow for the sector is also at 30 per cent of total sales, the highest share since 1990 – a sign of current strength.”
Still, BlackRock acknowledged that recent volatility has been exacerbated by policy uncertainty, prompting investors to exit crowded positions.
“For example, last week saw a rapid move away from popular trades, like the tech-heavy momentum equity style factor that had some of its sharpest declines since the pandemic. Both could drive more volatility in the near term.”
However, it underscored that, over time, “deleveraging will have run its course”, with uncertainty likely to ease as the outcomes of policy implementation becomes clearer. “Then, some of the risk premium investors now want for extreme uncertainty could be priced out again.”
Moreover, the financial giant remains underweight on long-term Treasuries, citing the disruption of the “fragile equilibrium” of long-term bonds.
“Long-term US Treasuries have briefly buffered against the stock retreat. But their portfolio diversification role has weakened since the pandemic.
“We think yields can climb as investors demand more compensation, or term premium, for the risk of holding long-term bonds. Recent inflation data has been noisy but core CPI is still above what’s consistent with the Federal Reserve’s 2 per cent target,” BlackRock said, adding that a likely rising US fiscal deficit could also lead to higher term premium.
Investors in recent years have seen long-term bonds as low risk, even with heavy government debt loads, on the back of the belief that low inflation and low interest rates were here to stay.
“But that fragile equilibrium has been disrupted. Germany’s plans to boost fiscal spending reinforce higher-for-longer rates – and bond yields – globally, we believe. We think gold could be a better diversifier than Treasuries in this environment,” BlackRock added.
