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Markets have swung sharply this year. AI buzz gave way to doubts over AI spending. In August, a rising unemployment rate in the U.S. sparked recession fears, spurring markets to expect rate cuts as deep as in past recessions. We said recession fears and such rate-cut pricing were overdone. This is not a typical business cycle – it’s a world shaped by supply constraints. The recent rise in unemployment was not due to layoffs but rather elevated immigration expanding the labor supply.
Employment growth is still robust, last Friday’s job data confirmed (see the chart below). The unemployment rate has fallen again, and markets have somewhat scaled back Federal Reserve rate cut expectations. Wage growth has cooled, bringing down inflation. Yet that might not last: Immigration will likely fall to its historical level – and no longer offset the decline in the workforce from population aging. That could push up inflation again.
Demographic divergence is one of five mega forces, or structural shifts, we see adding to inflation pressures and macro uncertainty in the long term. Yet the near-term macro picture presents reasons to keep leaning into risk. Cooling inflation has allowed the Fed to cut rates, and growth is not slowing sharply. We see this resilience reflected in corporate earnings strength expanding beyond the tech sector and stay overweight U.S. stocks on a six- to 12-month horizon.
Analysts expect earnings to grow 20% for tech and around a solid 8% for the rest of the market over the next 12 months, LSEG Datastream data show. We think the AI theme has more room to run. But as investors question big capital spending on AI by top tech companies, we’ve broadened our AI overweight to other sectors supporting the AI buildout: energy, utilities, real estate, and industrials.
We remain nimble as we eye the U.S. election, geopolitics, and big policy shifts globally. We went overweight Chinese stocks after the policy signal from the September politburo meeting suggested major fiscal stimulus may be coming. That doesn’t change the long-term structural challenges we are concerned about. We trimmed our Japanese equity overweight due to the drag on earnings from a stronger yen and mixed policy signals from the Bank of Japan. Iran’s strike on Israel and Israel’s promise of retaliation mark a major escalation in the Middle East. Its market impact has been limited but might grow if there’s further escalation. We stay pro-risk for now. Such events underscore that geopolitical risk is structurally elevated.
Long-term bonds may not reliably buffer against risk asset volatility in a supply-driven regime as shocks that fuel inflation could also push up yields. We prefer quality and income in bonds. We find it in Europe: short-term credit on less tight spreads and government bonds as yields better reflect our policy rate expectations than in the U.S. We like medium-term bonds in the U.S. as markets price in deep Fed rate cuts. On a strategic horizon, we like infrastructure equity and private credit as they look set to benefit from mega forces. Private markets are complex, with high risk and volatility, and aren’t suitable for all investors.
Our bottom line. We use our investment framework as an anchor in volatile markets heading into the fourth quarter. A key part of that involves interpreting incoming economic data through the lens of a world shaped by supply constraints – not a typical business cycle.
U.S. stocks were largely unchanged on the week, masking an uptick on Friday after a strong U.S. jobs report for September. Two- and 10-year Treasury yields surged to about 3.93% and 3.97%, respectively. Meanwhile, markets have somewhat reduced rate cut expectations that we thought were overdone. The U.S. economy added 254,000 jobs in September, well above consensus expectations. Strong job creation alongside easing wage pressures points to a still-expanding labor supply.
This week we eye U.S. CPI to see whether inflation will keep falling toward the Fed’s 2% policy target. Recent PCE data show core inflation is moderating as consumer spending on goods and services and supply have normalized after the pandemic. Immigration is also boosting the labor supply, cooling wage growth. Yet in the long term, we see structural supply constraints like a shrinking workforce due to population aging making inflation pressures persist.
Jean Boivin is Managing Director, Head of the BlackRock Investment Institute at BlackRock Inc.
Wei Li is Global Chief Investment Strategist, Blackrock Investment Institute at BlackRock Inc.
Vivek Paul, Global Head of Portfolio Research – BlackRock Investment Institute, and Natalie Gill, Portfolio Strategist – BlackRock Investment Institute, contributed to this article.
Disclaimer
This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date indicated and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any of these views will come to pass. Reliance upon information in this post is at the sole discretion of the reader.
© 2024 BlackRock Inc. All rights reserved. iSHARES and BLACKROCK are registered trademarks of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. This article first appeared Oct. 7, 2024, on the BlackRock website. Used with permission.
Image: iStock.com/Sofiia Potanina
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