Although investors continue to worry about ongoing US trade and fiscal policy changes, the current data suggests a recession is not necessarily on the horizon.
This is the view of analysts from the BlackRock Investment Institute, who instead believe “the biggest risk to U.S. growth is prolonged policy uncertainty”, they said in a recent note.
They warned US stocks could face more near-term pressure, but reiterated their overweight towards the asset class on a tactical horizon six- to 12-month horizon.
US stocks have endured a 10% correction as trade tariff uncertainty and government cuts start to weigh on US growth.
BlackRock’s analysts said that while job gains in the US have slowed since 2022, it remains above the long-term level they expect given an ageing workforce.
“U.S. corporate earnings expectations and high-frequency indicators of consumer health like weekly credit card spending are also solid,” they added.
However, they warned that near-term risks to growth still loom: current uncertainty could hit consumer spending, investment and trade.
“The longer policy uncertainty lasts, the more growth could suffer – but even that’s not certain,” they said.
Despite the recent equity sell-off, BlackRock said earnings expectations are healthy with 12% growth forecast for the S&P 500 index versus 14% last September.
“Tech corporate margins, earnings and revenues forecasts are holding up and the sector still has the fastest expected growth this year,” they said.
“Free cash flow for the sector is also at 30% of total sales, the highest share since 1990 – a sign of current strength.”
The analysts also said that recent volatility in the markets has been exacerbated by investors moving out of crowded positions.
One of the more popular trades, such as a tech-heavy momentum equity style factor, saw one of its sharpest declines since the pandemic.
“But, over time, deleveraging will have run its course and uncertainty will likely ease as we get more policy implementation details, such as the White House’s full tariff plan due in April,” the analysts said.
“Then, some of the risk premium investors now want for extreme uncertainty could be priced out again.”
While some investors have been fleeing to safety in the form of fixed income investments, BlackRock’s analysts are less optimistic for longer-duration bonds.
“We stay underweight long-term Treasuries as we see yields rising,” they said. “Long-term U.S. Treasuries have briefly buffered against the stock retreat. But their portfolio diversification role has weakened since the pandemic.”
“We think yields can climb as investors demand more compensation, or term premium, for the risk of holding long-term bonds.”
They argued that gold could be a better diversifier than US Treasuries in this environment.
