- The world's largest asset manager just issued a double-upgrade of US stocks to "overweight."
- BlackRock said the stock market's strong momentum can persist as the Federal Reserve navigates a soft landing in the economy.
- "We expect the rally to broaden out as inflation falls further, the Fed starts to cut rates, and the market sticks to its rosy macro outlook," BlackRock said.
The world's largest asset manager turned bullish on US stocks as a soft landing in the economy begins to materialize.
In a note on Monday, BlackRock, which manages $10 trillion in assets, double-upgraded US stocks to "overweight" from "underweight."
BlackRock's bullish tactical call comes with a six-month to 12-month time horizon and is predicated on the Federal Reserve successfully navigating a soft landing in the economy as it approaches its first interest rate cut since 2019.
"We expect the rally to broaden out as inflation falls further, the Fed starts to cut rates, and the market sticks to its rosy macro outlook," BlackRock market strategist Jean Boivin said.
Boivin's bullish shift was made decisive by the market's growing narrative that a recession will be avoided in 2024 just like it was in 2023 and 2022, despite a growing chorus of bearish forecasts. This bullish market narrative can ultimately last longer than most investors think.
"With markets tending to focus on one theme at a time, this [soft landing] narrative can support the rally over our tactical horizon and allow it to expand beyond tech. So we go overweight overall US stocks," Boivin said.
While inflation could still stage a rebound this year and lead to increased market volatility, BlackRock largely expects the rate of inflation to fall near the Fed's long-term target of 2%, giving the central bank plenty of room to cut interest rates this year.
But there are still risks present that could resurface in 2025, leading to a "rollercoaster" ride for inflation and overall volatility in the stock market. Boivin said a steady increase in wages, combined with a rebound in goods inflation, could push the inflation rate back to 3% in 2025 and ultimately hurt corporate profit margins.
"Wage growth has stayed high as an ageing US population keeps the labor market tight. Other mega forces like geopolitical fragmentation also add to inflation pressures, in our view," Boivin said. That could ultimately lead to fewer interest rate cuts than the market currently expects in 2024.
Overall, Boivin said upward momentum in the US stock market could last throughout 2024, but investors should stay nimble and prepare for an "inflation rollercoaster" in 2025.