BlackRock Bullish on S&P 500 Despite Potential Pullbacks; Tech Sector Expected to Deliver Strong Earnings

BlackRock sees S&P 500 pullbacks as buying opportunities By Investing.com

BlackRock (NYSE:BLK) analysts said in a note to clients Monday that they remain bullish on technology stocks as a driver of market returns despite recent volatility. The investment firm's focus lies on long-term structural shifts like Artificial Intelligence (AI), rather than short-term economic data like the Consumer Price Index (CPI). "We're eyeing how a surprisingly soft U.S. CPI report translates into PCE data," notes BlackRock. "We think cooling inflation means the Fed can start cutting rates in coming months." However, they downplay the significance of this data for tech stocks, emphasizing, "Looking through this near-term noise, we think tech will drive returns as consensus expects big tech companies to carry positive earnings results for the market," says the firm, adding that they "see pullbacks as an opportunity to lean into stocks." BlackRock highlights the resilience of the tech sector: "Consensus forecasts for tech earnings have risen well above those for the rest of the S&P 500. Analysts see tech earnings growing 18% year over year in Q2 versus 2% for the rest of the index." They acknowledge potential volatility, particularly surrounding chipmaker earnings reports in late August, but view pullbacks as buying opportunities. While BlackRock expects tech to maintain its earnings lead for now, they see it narrowing as AI adoption accelerates growth in other sectors, highlighting "the buildout of AI boosting sectors such as industrials, materials, energy and healthcare." This transformation, they believe, outweighs the recent rally in small-cap stocks, which BlackRock views as "more sensitive to higher interest rates and not exposed to the drivers of the transformation we expect." Overall, BlackRock advises against overreacting to economic data like the CPI. They remain confident in big tech's ability to deliver strong earnings and recommend staying invested in the technology sector and the broader U.S. market for long-term gains.

Tech Still Likely To Deliver On Earnings

We're witnessing some really powerful rotations in markets right now. You look at the catch-up of small cap, for example. And the powerful rotation has been catalyzed by markets extrapolating recent macro trends. For example, you look at the CPI, the surprise to the downside, that really brought back excitement of more cuts coming. 1) Staying cautious on macro I would caution, however, against extrapolating near-term macro trends, because it's so uncertain in this new environment. And yes, inflation is falling, but over the slightly longer horizon, you look at the structural forces - labor shortage, geopolitical fragmentation, greater fiscal spend and also the low-carbon transition - they are all pointing to inflation likely settling at a higher level compared to before. And yes, we are likely heading into the first Fed cut in the cycle in September. We're still talking about an environment where rates are likely staying high for longer compared to pre-pandemic levels. 2) Focusing on fundamentals And I continue to think that fundamentals and earnings prospects are key for deploying risk in equities. And I would observe that through the course of the recent rotation - very powerful rotation - the fundamental and earnings prospects have not really changed. Tech is still expected to deliver, year-on-year earnings growth of 18% in this current earnings season. U.S. broad market: 9%. U.S. ex-tech: 2%. 3) Near-term volatility likely For now, until the biggest event of the earnings season, Nvidia, which is taking place at the end of August, we could have some steam being let out - especially given recent rhetoric that is gaining traction. That is raising questions around return on investment for tech capex and also summer thin liquidity. But I actually think that is healthy. I would be willing to lean into dislocations being created as we re-underwrite our conviction in the fundamental picture. A tech-driven pullback has hit stocks this month as investors piled into segments like smaller companies on hopes for cooling inflation and Federal Reserve interest rate cuts. Looking through this near-term noise, we think tech will drive returns, as consensus expects big tech companies to carry positive earnings results for the market. We see pullbacks as an opportunity to lean into stocks. We stay overweight the AI theme and U.S. stocks as we watch for the AI buildout to boost other sectors. Tech vs. the rest Earnings expectations for S&P 500 tech sector over other sectors, 2019-2024 Tech stocks have led the U.S. equity retreat from record highs, reached on hopes for big tech companies to keep beating high earnings expectations thanks to the AI theme. Stocks for debt-laden and interest rate-sensitive small companies surged 3.7% after the soft June CPI data reignited market hopes for quicker Fed rate cuts. We expect this rebound to be short-lived as central banks likely hold rates higher for longer given persistent inflation pressures. Rather than the macro, we think the market is being driven by structural shifts like AI that are spurring a transformation. We're monitoring the impact on Q2 earnings. Why? Consensus forecasts for tech earnings have risen well above those for the rest of the S&P 500. See the chart. That's still playing out: Analysts see tech earnings growing 18% year over year in Q2 versus 2% for the rest of the index, LSEG Datastream data show. Such forecasts set a high bar for tech companies to keep delivering on earnings. We think they can, but more volatility could be ahead with Nvidia's highly expected results due in late August. We especially see sudden pullbacks during the northern hemisphere summer, when reduced trading activity can exacerbate market volatility. The tech sector could also suffer if investors worry earnings growth won't justify big capital spending on AI. Those worries likely contributed to the share drop for major chipmakers - on top of news of potential U.S. efforts to further limit foreign access to chips. Any trade or regulatory policy changes after the U.S. election in November that restrict the AI buildout could hurt tech, too. U.S. President Joe Biden's announcement over the weekend that he will drop out of the presidential race may add to volatility, although pressure had been building in recent weeks. We monitor these risks while staying overweight the AI theme - and for now see sudden pullbacks as an opportunity to dial up risk-taking. This environment requires a new investment playbook. The earnings lead for the tech sector could narrow later this year as analysts expect earnings to improve in other sectors. We see the buildout of AI boosting sectors such as industrials, materials, energy, and healthcare as it helps drive a transformation potentially on par with past technological revolutions. We don't believe the rally in U.S. small capitalization stocks is part of this eventual earnings improvement. They are more sensitive to higher interest rates and not exposed to the drivers of the transformation we expect. Case in point: U.S. small caps have suffered five quarters of shrinking earnings due to higher rates. Regionally, we see selective opportunities in Europe as lower interest rates support growth and already improving earnings. At the sector level, we were more positive on banks earlier in the year, given their resilient balance sheets. Relative valuations now look pricier. We prefer construction, utility, and semiconductor companies that benefit from rate cuts and mega forces. We also went overweight UK stocks because post-election political stability and recovering growth could boost valuations. We lean against the market extrapolating too much from a single data release like the CPI. We expect big tech firms to keep driving equity returns. We stay overweight U.S. stocks and the AI theme. U.S. stocks pulled back from record highs last week. Technology names led the retreat, driven by concerns over potentially stronger restrictions on semiconductor exports to China. A global IT outage stoked further unease. We expect some bouts of volatility ahead, as reflected in the surge in small cap shares. U.S. 10-year Treasury yields (US10Y) edged up on the week - showing that investors were not viewing this equity rotation and volatility as a pure risk-off episode, in our view. We're watching July U.S. PCE data - the Fed's preferred inflation measure - to see if the decline in CPI services inflation is repeated. June saw core services inflation, excluding housing, fall for a second month straight. We think the recent slowdown in services inflation is not consistent with current wage gains. We still expect the Fed to cut rates in 2024, but to levels higher than pre-pandemic.