BlackRock: Suggests moderately overweighting U.S. stocks before the end of the year, with a focus on financials, consumer discretionary, and specific technology sectors

According to the Zhitong Finance APP, BlackRock stated that in terms of stocks, it recommends moderately overweighting U.S. stocks before the end of the year, with a focus on financials, consumer discretionary, and specific technology sectors. At the same time, BlackRock will reduce its holdings in "defensive" sectors (especially consumer staples) to fund the moderate overweighting of equity assets. In terms of bonds, there are still opportunities in corporate bonds, securitized products, and other forms of credit products, but investors should remain cautious about long-term U.S. Treasuries. As the bond market has struggled to absorb a large supply of bonds, long-term U.S. Treasuries may face greater challenges in the coming months or even years.

With the U.S. election results settled, investors have shifted from a wait-and-see stance to actively chasing U.S. stocks and other risk assets. Last week, the S&P 500 index rose 4.7%, marking its best weekly performance since October 2022. This week, the Federal Reserve released the minutes from its November monetary policy meeting, and driven by market optimism, the S&P 500 index rose again by the end of the day.

BlackRock stated that the current rally is backed by market expectations of stronger U.S. economic growth and a more relaxed regulatory environment (especially in financial regulation). Now that the U.S. election results are out, the market's reaction has also calmed down.

As the year-end approaches, how should investors view the U.S. stock market trends before the end of the year? BlackRock believes that the following three points are worth noting: the continued strength of U.S. stocks, cyclical stocks leading the way, and a further steepening of the yield curve.

Although U.S. stocks have accumulated a 25% increase since the beginning of the year (as of November 20), which represents a significant premium compared to other markets and historical levels, BlackRock believes that this upward trend may continue in the short term. In addition to growth in the consumer market and loose monetary policy, U.S. stocks may also benefit from seasonal strength and market optimism regarding more fiscal stimulus policies and regulatory easing measures.

In terms of individual stocks, BlackRock expects cyclical stocks to continue to lead, consistent with the trends observed in recent months. BlackRock believes that the growth rate of the U.S. economy may not be too high, currently maintaining a healthy level of 2.5% to 3%, but investors may continue to favor companies or sectors with operational leverage (i.e., the ability to increase revenue through increased income), including the consumer discretionary sector and financial sector that have led after the election (as shown in the figure below). The financial sector not only benefits from strong U.S. economic growth and a steep yield curve but may also experience a more relaxed regulatory environment under Republican governance, further boosting its performance.

Source: LSEG Datastream, MSCI, and BlackRock Think Tank, data as of November 10, 2024 BlackRock mentioned that, in addition to the stock market, the market environment for bonds and interest rates may also be affected, especially long-term U.S. Treasuries. The main reason is that, against the backdrop of a strengthening U.S. economy, any new stimulus measures could change the pace and magnitude of future interest rate cuts by the Federal Reserve; secondly, in addition to monetary policy, tax reduction policies and/or stimulus measures financed through debt could further exacerbate the already historically high fiscal deficit in the U.S., thereby increasing the issuance of U.S. Treasuries.

It is worth noting that although U.S. Treasury yields have rebounded from the lows in September, the additional yield compensation (i.e., term premium) that investors receive for taking on long-term risks remains at a moderate level compared to historical levels. If bond investors begin to anticipate larger multi-year fiscal deficits, the yields on long-term bonds may accelerate further, surpassing those of short-term bonds, thus creating a steeper yield curve