BlackRock lowers its rating on U.S. stocks
BlackRock Investment Institute says it's time to take advantage of rising bond yields.
Earnings season kicks off Tuesday with big banks in focus, but tech is stealing the spotlight, with that sector set to continue selling off following a slump in Korean chip stocks.
Tech has been the main driver behind the S&P 500's SPX bull market, which has entered year four. The index carved out much of its 14% gain this year so far in the spring, bouncing off April lows. It has been a grind since, with the S&P 500 up around 2.6% between June and Monday's close of 7,807. That's as Treasury yields across the maturity curve are hovering at two-decade highs.
Our call of the day from the world's largest asset manager BlackRock says those bond yields can no longer be ignored, and they are now shifting money into Treasurys - specifically shorter-term - while taking some U.S. equity exposure off the table.
"Higher yields and potentially excessive Fed tightening expectations create room to unwind our U.S. Treasury underweight - a mainstay for most of the last six years," a team led by Jean Boivin, head of BlackRock Investment Institute, the asset manager's think tank, told clients in a note on Monday. "Now, yields have reset toward our long-held higher-rates view, and we want to lock in some attractive income."
They upgraded shorter-term Treasurys to overweight, and long-term Treasurys to neutral, "as higher yields now provide better compensation for interest-rate risk." The yield on 10-year Treasurys BX:TMUBMUSD10Y sat near 0.9% in October 2020 when they first went underweight, but are currently at 5.197%. The yield on 2-year Treasurys BX:TMUBMUSD02Y has climbed from 0.16% in 2020 to 4.778% currently, a level last seen in 2007.
Markets are pricing in an additional 160 basis points of Fed hiking over the next 12 months, but they see that move as overdone. The BlackRock team said with term premium - the extra return demanded by investors to hold long-term Treasurys - averaging around 75 basis points since September, higher yields are "offering a more attractive entry point."
With yields at multi-decades-highs, investors have a build-in safety cushion, and those would have to climb another 75 basis points before returns are no longer positive, they said.
Bond investors are earning an inflation-adjusted return not seen in decades.
The money going into Treasurys is being funded in part by closing out a long-held U.S. equity overweight and shifting to neutral "to manage potential volatility around the AI build-out."
Boivin and his team, insist they are "managing near-term risk" and not changing their core convictions - they see AI transformation as still intact. "Higher rates are increasingly differentiating companies by their ability to generate earnings and returns above the cost of capital."
"We still favor AI-related companies and listed infrastructure, where growing demand and scarcity in critical infrastructure support attractive returns. Existing infrastructure could grow even more valuable amid this scarcity," they said.
Even if the narrative around AI swings around, they see fundamentals prevailing, noting how S&P 500 third-quarter earnings are expected to grow 30% year-over-year, based on FactSet data.
The BlackRock Investment Institute has adjusted its positioning on U.S. equities a "handful of times" in recent years, mostly between overweight and neutral, a spokesman said in emailed comments. It held an overweight for close to a year before moving to neutral in March, but then shifted to overweight on U.S. stocks in April.
The markets
Dow industrial futures (YM00) are higher, those for the Nasdaq-100 (NQ00) are lower and S&P 500 futures (ES00) are flat. Oil prices (CL.1) (BRN00) are down over 1%, and Treasury yields BX:TMUBMUSD10Y are easing.
Key asset performance Last 5d 1m YTD 1y S&P 500 7807.24 0.43% 2.46% 14.05% 17.32% Nasdaq Composite 27,245.90 -0.84% 4.05% 17.23% 20.05% 10-year Treasury 5.196 -11.60 20.80 102.40 116.00 Gold 4208.9 0.39% -2.87% -2.85% 1.19% Oil 92.1 2.44% -12.68% 60.43% 57.19% Data: MarketWatch. Treasury yields change expressed in basis points
The buzz
Big banks are reporting results, and JPMorgan Chase's (JPM) missed expectations while Wells Fargo's $(WFC)$ narrowly beat them. Follow live coverage.
UnitedHealth (UNH) reported forecast-beating results and lifted its outlook. Shares are up.
A two-day slump in microchip stocks is partly being blamed on comments by Broadcom (AVGO) CEO Hock Tan, who reportedly compared AI investors to casino gamblers. That and concerns over China competition led to a 5% slump for the Korean Kospi KR:180721 on Tuesday.
Existing-home sales are scheduled for 10 a.m.
Richmond Fed President President Thomas Barkin will speak at 1 p.m. and the monthly U.S. Treasury balance for September is due at 2 p.m.
This one chart from the IMF tells the entire story of the world economy this year.
The chart
Bank of America's October global fund manager survey revealed a net 31% of respondents consider the biggest tail risk for markets - a rare event that can trigger losses for investors - to be a "disorderly rise in bond yields." An AI bubble was ranked second, according to 23% of respondents, and a second wave of inflation was the third, cited by 20% of respondents, with a hyperscaler credit event seen as that big risk by 11%.
Top tickers
These were the top-searched tickers on MarketWatch as of 6 a.m.:
Ticker Security name NVDA Nvidia GME GameStop TSLA Tesla MU Micron SPCX SpaceX AMZN Amazon AMD Advanced Micro Devices TSM Taiwan Semiconductor Manufacturing AAPL Apple MSFT Microsoft
-Barbara Kollmeyer