BlackRock Commentary: Earnings outlook: Show us the growth

Jean Bovin – Head of BlackRock Investment Institute, together with Wei Li – Global Chief Investment Strategist, Alex Brazier – Deputy Head, and Carolina Martinez Arevalo – Portfolio Strategist all forming part of the BlackRock Investment Institute, share their insights on global economy, markets and geopolitics. Their views are theirs alone and are not intended to be construed as investment advice.

Key Points

Earnings outlook: Higher expected corporate earnings mask broad pressure under the surface. We see more earnings pain ahead and look for opportunities at the sector level. 

Market backdrop: U.S. Treasury yields surged and stocks dipped last week. Data confirmed the U.S. labor market is still tight. We see signs markets are adjusting to the new regime. 

Week ahead: All eyes are on U.S. CPI inflation data out this week. Continued evidence of stubbornly high inflation could add momentum to the recent rise in bond yields.

Bond yields have jumped, and we think markets are at a key juncture as central banks are poised to hold tight on policy. As Q2 results begin, corporate earnings need to deliver on market expectations to support stocks, in our view. We see a key divergence in earnings forecasts: They have risen for a few tech firms, while the rest stagnate. Profit margins are shrinking, and we see more pressure ahead. So we get granular and favor sectors like healthcare within developed market stocks.

Q1 earnings growth was flat to slightly negative, Refinitiv and Factset data show. That masks significant divergence: We see a common denominator between what’s driving market performance this year and earnings – the artificial intelligence (AI) buzz. S&P 500 earnings forecasts for the next 12 months have risen in recent months (dark orange line in the chart) along with the market rally driven by tech firms with the largest market capitalization. Stripping out those mega-cap tech stocks, forecasts are flat this year (yellow line). 2023 consensus estimates have been cut but remain well above our expectation. We expect Q2 data will be similar to Q1 as the reporting season kicks off this week, with a contraction hitting in the second half of 2023. We assess profit margins, shaped by earnings and revenues, for cracks, too. Margins jumped during the pandemic when consumer demand for goods was strong and companies could push up prices as input costs soared.

Margins have slid since last year as spending shifted back to services, but they remain above their pre-Covid highs. At the same time, data like Friday’s U.S. jobs report reinforce how tight labor markets are in the U.S. and Europe. The key question right now, in our view: If rate hikes are not squeezing the labor market, where will the squeeze come from? Corporate profit margins, we believe, as wage gains and still-solid employment take a bigger toll on margins than in the past. Tight labor markets have caused employers to up wages to attract new hires. Broad worker shortages could incentivize companies to hold onto workers – even if sales decline – out of fear they won’t be able to hire them back. This outlook poses the unusual possibility of “full employment recessions” in the U.S. and Europe.

High stakes for earnings

Last week’s surge in government bond yields put some pressure on equities – and highlights that companies will need to deliver on the market’s earnings expectations as the Q2 reporting season gets under way to avoid more pressure. Resilient consumers have helped support earnings, but we see them exhausting the savings built up during the pandemic this year.

Yet not all corporate sectors will suffer margin pressures in the same way, as is reflected in market pricing. We tilt toward certain sectors within a modest underweight to developed market equities on a six- to 12-month tactical horizon: divergences create opportunities depending on what’s priced in. For example, technology and healthcare margins saw a boost during the pandemic. They could avoid the broad decline we expect as quality sectors that stand to benefit from mega forces, like AI and aging populations. These forces are driving profits now and in the future – and markets are reacting, as with this year’s tech rally. Plus, we like healthcare’s more attractive valuations and generally steady cash flow during economic downturns.

We also like the industrial sector, particularly automakers as they better price in future earnings risk while adding diversification and quality to our defensive portfolios. Automakers would also benefit if the downturns we expect do not occur and consumers stay strong. With a regional lens, we see the earnings improvement at European financials carrying on: Higher interest rates should boost their profit margins, and some are returning capital to investors via buybacks.

Bottom line

We see tight labor markets squeezing profit margins, and we think earnings will come under more pressure in the second half of the year. We think this macro environment is not a friendly one for broad asset class exposures. That’s why we get granular within developed market stocks and identify our selective preferences across regions and sectors.

Market backdrop

U.S. 10-year Treasury yields approached 15-year highs above 4% and stocks dipped last week after U.S. jobs data showed a still tight labor market. The unemployment rate fell lower, labor participation hasn’t risen further and wages are still growing even after the Fed’s rapid rate hikes. We think the yield move and equity retreat signal we are at an important juncture: Markets are coming around to our view that central banks will be forced to keep policy tight to curb inflationary pressures.

Stubbornly high U.S. CPI inflation data this week could bolster the recent bond yield surge as markets expect the Fed to hike rates this month after a June pause. The Bank of Canada hiked after a pause – and markets are leaning toward odds of another hike this week. We think central banks will be forced to keep policy tight to lean against inflationary pressures.

Week Ahead

July 10-17: China total social financing

July 12: U.S. CPI inflation; Bank of Canada policy rate decision

July 13: China trade data; U.S. initial jobless claims

July 14: University of Michigan consumer sentiment survey

BlackRock’s Key risks & Disclaimers:

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 10th July, 2023 and may change. The information and opinions are derived from proprietary and non-proprietary 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 material 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 forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader.

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MeDirect sponsors Malta’s biggest coding competition – CodeSprintMT

MeDirect, Malta’s first digital bank, will be the title sponsor of the Open Developers Category during CodeSprintMT, Malta’s biggest coding challenge, which is taking place later this month. Launched in 2018 as a coding contest for students studying computing in secondary schools, the event has now grown into a national coding championship with additional categories for post-secondary students and an open category for undergraduate, postgraduate students and established software developers.

Chris Portelli, Chief Technology Officer at MeDirect, said “Competitions like CodeSprintMT are a great opportunity for aspiring and experienced software developers, particularly young individuals wanting to enhance skills and test their abilities against peers. In addition to being a great learning opportunity, CodeSprintMT also creates an environment where hundreds of young people can enjoy being part of a like-minded community. As a digital bank with ambitions to expand our WealthTech business further across Europe, it is exciting for us to see so many young people acquiring software development expertise and we are all very much looking forward to seeing some great projects emerge during the competition.”

The main objective in all the competition categories within CodeSprintMT, including the open category, is to test participants’ problem solving, computational and programming skills. The challenge is an open book exercise, and the participants’ work is judged against a set of assessment criteria based on functionality and effectiveness. Contestants within the open category will have to overcome an 8-hour coding marathon. The top three participants in CodeSprintMT will be rewarded with prestigious study programs and mentorship opportunities, aimed at advancing their programming skills to a world-class level. Additionally, they will receive a cash prize as part of their well-deserved recognition.

CodeSprintMT is organised by the Ministry of Education, Youth, Sport, Research & Innovation together with ICE Malta. Josmar Borg, Education Officer Computing within the Ministry, and the coordinator of the competition, said “To see organisations like MeDirect appreciating the value of a national coding championship and taking the decision to invest in this event is a great validation of all our efforts to raise the game when it comes to teaching and enhancing computing and software development skills in Malta. As partners in Malta’s future economic progress, we are committed to making this year’s CodeSprintMT an even greater success.”

More information of CodeSprintMT is available at  The open category competition will take place on 15 July at the ICE Malta premises. This will be followed by a VIVA session for the top 5 on 19 July and an awards ceremony on 22 July whereby the top 3 winners across all competitions are announced.

Photocaption: (from left) Chris Portelli, Chief Technology Officer at MeDirect, Steve Ritchie, Head – Software Development at MeDirect, Josmar Borg, Education Officer Computing at the Ministry of Education, Nikolai Sammut, CEO at ICE Malta and Clinton Paul Borg, Enterprise Architect at MeDirect, discussing preparations for CodeSprintMT.

MeDirect jisponsorja l-akbar kompetizzjoni ta’ coding f’Malta – CodeSprintMT

Il-Bank MeDirect huwa l-isponsor ewlieni tal-Kategorija Open Developers waqt CodeSprintMT li hi l-akbar sfida ta’ coding f’Malta. CodeSprintMT ser isseħħ aktar tard dan ix-xahar. Imniedi fl-2018 bħala konkors ta’ coding għal studenti li jistudjaw l-informatika fl-iskejjel sekondarji, l-avveniment issa kiber f’kampjonat nazzjonali ta’ coding b’kategoriji addizzjonali għal studenti post-sekondarji u kategorija miftuħa għal studenti li għadhom ma ggradwawx, dawk gradwati u software developers stabbiliti.

Chris Portelli, Chief Technology Officer ta’ MeDirect, qal “Kompetizzjonijiet bħal CodeSprintMT huma opportunità kbira għal software developers, kemm għal dawk li għadhom qed jitgħallmu u anke għal dawk li diġa’ għandhom esperjeza fis-settur, biex itejbu l-ħiliet tagħhom. Minbarra li hija opportunità kbira ta’ tagħlim, CodeSprintMT toħloq ukoll ambjent fejn mijiet ta’ żgħażagħ jistgħu jieħdu pjaċir li jkunu parti minn komunità li jaħsbuha l-istess. Bħala l-ewwel bank diġitali b’ambizzjonijiet li jespandi aktar in-negozju tiegħu ta’ WealthTech madwar l-Ewropa, huwa interessanti għalina li naraw tant żgħażagħ jakkwistaw għarfien espert fl-iżvilupp tas-software u lkoll ħerqana li naraw xi proġetti kbar joħorġu waqt il-kompetizzjoni.”

L-għan ewlieni fil-kategoriji kollha tal-kompetizzjoni fi ħdan CodeSprintMT, huwa li jiġu ttestjati l-ħiliet ta’ soluzzjoni tal-problemi kemm komputazzjonalii, kif ukoll programmazzjonali tal-parteċipanti. Ix-xogħol tal-parteċipanti jiġi ġġudikat skont sett ta’ kriterji ta’ valutazzjoni bbażati fuq il-funzjonalità u l-effettività tal-proġett. Il-kontestanti fi ħdan il-kategorija miftuħa se jkollhom maratona ta’ coding ta’ 8 sigħat. L-aqwa tliet parteċipanti f’CodeSprintMT se jiġu ppremjati bi programmi ta’ studju prestiġjużi u opportunitajiet ta’ konsulenza, immirati biex javvanzaw il-ħiliet tagħhom għal livell ta’ klassi dinjija. Barra minn hekk, huma se jirċievu premju fi flus bħala parti mir-rikonoxximent mistħoqq lilhom.

CodeSprintMT hija organizzata mill-Ministeru tal-Edukazzjoni, Żgħażagħ, Sport, Riċerka u Innovazzjoni flimkien ma’ ICE Malta. Josmar Borg, Education Officer Computing fi ħdan il-Ministeru, u l-koordinatur tal-kompetizzjoni, qal “Li tara organizzazzjonijiet bħal MeDirect japprezzaw il-valur ta’ kampjonat nazzjonali tal-coding u jieħdu d-deċiżjoni li jinvestu f’dan l-avveniment hija validazzjoni kbira tal-isforzi tagħna biex inkomplu navvanzaw meta niġu għat-tagħlim u t-titjib tal-ħiliet tal-kompjuters u l-iżvilupp tas-software development f’Malta. Bħala msieħba fil-progress ekonomiku ta’ Malta, aħna impenjati li nagħmlu l-CodeSprintMT ta’ din is-sena suċċess saħansitra akbar minn qabel.”

Aktar informazzjoni fuq CodeSprintMT tinsab fuq Il-kompetizzjoni se ssir fil-15 ta’ Lulju fil-bini ta’ ICE Malta. Din se tkun segwita minn sessjoni VIVA għall-aqwa 5, fid-19 ta’ Lulju. Iċ-ċerimonja tal-premjazzjoni fejn se jitħabbru l-aqwa 3 rebbieħa fil-kompetizzjonijiet kollha ser issir fit-22 ta’ Lulju.

Ritratt: (mix-xellug) Chris Portelli, Chief Technology Officer ta’ MeDirect, Steve Ritchie, Head – Software Development ta’ MeDirect, Josmar Borg, Education Officer Computing fil-Ministeru tal-Edukazzjoni, Nikolai Sammut, Kap Eżekuttiv ta’ ICE Malta u Clinton Paul Borg, Enterprise Architect ta’ MeDirect, jiddiskutu t-tħejjijiet għal CodeSprintMT.


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