A slight improvement in second-quarter corporate earnings in the US after a year of stagnation offers scope for investors to take a selective approach to their equities allocation.
“Market expectations for a pick-up in margins over the next year look rosy as worker shortages keep pressure on wages,” said Jean Boivin, head of the BlackRock Investment Institute.
As a result, he said investors should keep a close eye on the labour market and stay granular in developed market (DM) stocks.
A selective stance
To identify the specific sectors to focus on, Boivin said BlackRock is using its new investment playbook that considers the new macro and market regime.
“Tech aligns with our preference for sectors delivering earnings growth,” he explained, adding that technology met a high bar in the most recent earnings season.
“But we stay selective in tech with our overweight to the DM artificial intelligence mega force theme, tapping into this structural shift within DM stocks even when the macro is unfriendly to broad equity,” said Boivin.
Other sectors that perform well as economic activity picks up fared better than expected include industrials, communication services and consumer discretionary.
The old playbook would have questioned consumer sector resilience in line with stagnating US growth, especially as pandemic-related savings dwindle. Instead, BlackRock’s new approach for today’s investment era considers the potential differences of the sector impact.
“We think workers gaining income share from firms and unemployment staying low could reinforce consumer spending power for some time,” added Boivin.
The asset manager also believes there will be some regional differences across DM. For example, the second-quarter earnings of European firms contracted twice as much as their US peers, contributing to European stocks underperforming DM counterparts in recent months.
In line with the divergence, BlackRock prefers equities in Japan within the DM universe, eyeing the relatively easy policy, negative real rates and shareholder friendly reforms taking root.
