BlackRock Commentary: Sticking with U.S. tech surge

Jean Boivin – Head of BlackRock Investment Institute together with Wei Li – Global Chief Investment Strategist, Beata Harasim – Senior Investment Strategist 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

Tech rally rolls on: We see a small group of tech winners leading stock gains as a feature of the artificial intelligence (AI) theme – not a flaw. We stay overweight U.S. stocks.

Market backdrop: The S&P 500 notched a fresh all-time high last week, led by tech stocks. U.S. 10-year Treasury yields held steady near 4.25% during the holiday-shortened week.

Week ahead: We’re eyeing to what extent U.S. PCE inflation for May shows a slowing of services inflation after upside surprises earlier in the year.

U.S. stocks have climbed to all-time highs thanks to the technology sector. We’re less concerned than some in the market about the small group of tech stocks driving gains. Why? First, excitement over AI is being met by tech firms delivering on and beating high earnings expectations. Second, profit margins for tech are leading the market, but they’re also recovering in other sectors as cooling inflation eases costs pressures on margins. We stay overweight U.S. stocks on the AI theme.

We think strong gains for tech stocks have been fueled by market focus on AI and investors preferring quality given high macro and market uncertainty. The sector is up 30% this year, nearly four times higher than the rest of the S&P 500, according to LSEG Datastream data. See the green and orange lines in the chart. Looking back to 2023, tech’s dominance is even clearer: The sector has soared 100% since then, while the rest of the index rose 24%. AI has helped drive that outperformance by brightening corporate earnings for tech firms. Analysts expect they’ll rise 20% in the next 12 months – well above forecasts for the rest of the market. Tech firms have so far delivered on lofty expectations: Their earnings grew 23% year over year in Q1. In a world where mega forces – big structural shifts – drive returns now and in the future, we eye the short- and long-term impacts of AI on earnings.

Strong balance sheets are also a reason we like tech, and we are less concerned about valuation metrics. Free cash flows – excluding operational costs – as a share of sales are nearly double for tech than for the broader market, and tech has the largest profit margins across sectors, LSEG Datastream data show. Plus, many top tech names are highly profitable and cash-flush, allowing them to fund the buildout of AI infrastructure such as data centers. A search for such quality may have spurred investors to flock to U.S. stocks even more in recent weeks as their European counterparts have retreated. Much of the slide in European stocks came after the results of the European Union elections and news of a snap election in France.

Broadening earnings

U.S. tech strength is overshadowing gains that are broadening out to other sectors – up about 8% so far this year. Eight of 11 of the S&P 500 sectors saw higher margins in Q1 versus the same period last year. The reason: support from nominal GDP growth that looks set to remain above the pre-pandemic average due to higher inflation. That outlook seems likely even as the pace of real, or inflation-adjusted, growth slows. Inflation falling from its pandemic peaks – though remaining high – has eased pressure on margins by lowering costs. Guided by mega forces, we see sectoral opportunities as risk appetite broadens out. We still favor healthcare given support from recovering earnings, drug innovation and aging populations. We also like the industrial sector because it will help build out the infrastructure needed for AI and the low-carbon transition. Supply chains rewiring along geopolitical lines will also affect the sector as companies and countries bring production closer to home.

What could halt the climb in tech stocks? Markets could lose favor for the sector if hopes for AI are dampened, such as if they feel corporate spending on AI hasn’t paid off in a boost to earnings or margins. Any regulatory changes limiting adoption could also affect AI’s potential to keep supporting tech. In a less likely scenario, other sectors could jump ahead of tech if growth accelerates, and inflation falls enough to allow the Federal Reserve to cut interest rates more than expected.

Our bottom line

The concentration in U.S. tech stocks is a feature, not a flaw, of the AI theme. We stay overweight U.S. stocks on a six- to 12-month, tactical horizon and still prefer the AI theme. We like industrials and healthcare as stock gains broaden.

Market backdrop

The S&P 500 notched a fresh all-time high last week, led by tech stocks. U.S. 10-year Treasury yields held steady near 4.25% during the holiday-shortened week. Since France’s snap parliamentary election was announced, spreads of 10-year French government bond yields over German bunds have hovered near their widest levels since the euro area crisis. The Bank of England left rates unchanged – but we think it will likely start rate cuts in August after the early July election.

We’re eyeing May U.S. PCE data – the Fed’s preferred inflation measure – for signs that services inflation is easing. Cooler-than-expected U.S. CPI data for May showed falling core goods prices. But sticky services prices mean inflation will continue to outpace the Fed’s 2% goal in the medium term.

Week Ahead

June 25: U.S. consumer confidence

June 27: U.S. durable goods

June 28: U.S. PCE; Japan unemployment data

June 30: China NBS manufacturing PMI


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 24th June, 2024 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.

The information provided here is neither tax nor legal advice. Investors should speak to their tax professional for specific information regarding their tax situation. Investment involves risk including possible loss of principal. International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation, and the possibility of substantial volatility due to adverse political, economic or other developments. These risks are often heightened for investments in emerging/developing markets or smaller capital markets.

Issued by BlackRock Investment Management (UK) Limited, authorized and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL.


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Epic Investment Partners Views: The Week Ahead

Markets will have to wait for the latter part of this week for key data prints including the US GDP and PCE core (Thursday), and the PCE deflator prints (Friday). We have a fair amount of central bank chatter to digest ahead of that. Today we have the ECB’s Schnabel, Villeroy de Galhau (and again on Friday), and the Fed’s Daly. On Tuesday we’ll hear from the Fed’s Cook and Bowman and the ECB’s Stournaras. The BoE releases its financial stability report on Thursday, and then on Friday the Fed’s Barkin delivers a keynote speech. 

The US Conf. Board consumer confidence prints on Tuesday will garner market attention given the recent weakness in consumer data. US home sales are due on Wednesday. Thursday’s data includes China’s industrial profits, eurozone confidence and US durable goods, initial jobless claims, GDP and core PCE prints. On Friday we have UK GDP, US PCE, spending and income, and the Uni. of Michigan consumer sentiment readings.  

Last week we had further mixed US data, by way of weaker-than-expected retail sales in May, coupled with previous downward revisions. Housing starts and building permits also disappointed, falling in May, against expectations for a marginal rise. Sentiment improved at the end of the week, as the S&P Global PMI prints for May surprised to the upside. The stronger PMIs, coupled with broadly hawkish Fed speak underpinned the dollar (DXY Index +0.23%), while US Treasuries pared earlier gains; the 10-year benchmark rose 4bps to 4.26%. Meanwhile, the S&P Index rose 0.61%, and Brent crude rose to $85.24pb, 3.17% higher on the week.  

Elsewhere, the People’s Bank of China (PBoC) plans to gradually incorporate secondary market transactions of government bonds into its monetary policy toolkit, as announced by Governor Pan Gongsheng. This move reflects the increasing scale and depth of China’s bond market, enabling the central bank to manage liquidity through buying and selling government bonds. Pan emphasised that this approach is not quantitative easing, but rather a tool for liquidity management and base money injection. China kept its benchmark lending rates unchanged, with the one-year loan prime rate (LPR) at 3.45% and the five-year LPR at 3.95%. This decision comes amid signs of economic weakness, including falling new home prices and lower-than-expected bank lending, highlighting the challenges in balancing monetary easing with concerns over interest rate margins and currency stability, 

Closer to home, the BoE held pat on rates despite earlier inflation reaching target. The BoE’s primary concern, mirroring its US counterpart, is persistent service inflation, which only marginally decreased to 5.7% from 5.9% in April. The central bank attributed part of these increases to regulated prices and volatile components, rather than underlying inflationary pressures.  The BoE raised its Q2 2024 GDP growth forecast to 0.5%, indicating economic recovery. However, concerns persist about potential inflation risks from wage growth and energy prices. Markets now estimate a 66% chance of a rate cut in August, up from 30% before the BoE’s announcement, suggesting the central bank might begin easing in August barring unexpected developments in June’s inflation data.  Over in Europe, markets whipsawed through the week amid the political turmoil in France. The ECB warned that eurozone countries face significant fiscal challenges due to ageing populations, increased defence spending, and climate change. Countries will need to reduce budget deficits by an average 5% of GDP, requiring EUR 720bn in savings or revenue. The ECB urged immediate action, especially from high-debt nations, to meet the EU’s 60% debt-to-GDP target by 2070. This comes as seven countries, including France, were reprimanded for breaching EU fiscal rules. While the required adjustments are substantial, the ECB notes they’re not unprecedented, emphasising that delaying action will only increase future costs.


Epic Investment Partner’s Key risks & Disclaimers:

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MeDirect Disclaimers:

This information has been accurately reproduced, as received from EPIC Investment Partners. No information has been omitted which would render the reproduced information inaccurate or misleading. This information is being distributed by MeDirect Bank (Malta) plc to its customers. The information contained in this document is for general information purposes only and is not intended to provide legal or other professional advice nor does it commit MeDirect Bank (Malta) plc to any obligation whatsoever. The information available in this document is not intended to be a suggestion, recommendation or solicitation to buy, hold or sell, any securities and is not guaranteed as to accuracy or completeness.

The financial instruments discussed in the document may not be suitable for all investors and investors must make their own informed decisions and seek their own advice regarding the appropriateness of investing in financial instruments or implementing strategies discussed herein.

If you invest in this product you may lose some or all of the money you invest. The value of your investment may go down as well as up. A commission or sales fee may be charged at the time of the initial purchase for an investment. Any income you get from this investment may go down as well as up. This product may be affected by changes in currency exchange rate movements thereby affecting your investment return therefrom. The performance figures quoted refer to the past and past performance is not a guarantee of future performance or a reliable guide to future performance. Any decision to invest in a mutual fund should always be based upon the details contained in the Prospectus and Key Information Document (KID), which may be obtained from MeDirect Bank (Malta) plc.

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