BlackRock (Nasdaq: BLK) recently noted that there’s broad agreement among portfolio managers that a concentrated group of AI winners “will drive returns over a short-term tactical horizon.”
BlackRock also mentioned in a recent market update that US stocks reached record highs and bond yields fell “after the May CPI came in below expectations.”
The Federal Reserve now only “expects to cut rates once this year.”
They’re watching the UK CPI data “to see if falling goods prices are bringing inflation down enough for the Bank of England to start cutting policy rates.”
BlackRock investment leaders met June 6-7 for their semiannual Outlook Forum.
As stated in the extensive update from BlackRock, there’s a growing consensus among portfolio managers and central bankers that interest rates “will stay higher for longer due to persistent inflation.”
BlackRock also shared:
“We now think the artificial intelligence (AI) buildout could be inflationary in the near term – a shift in our view at the previous Forum that AI could cool inflation. We see a group of AI winners driving returns over a short-term tactical horizon of six to 12 months.”
Since their last Forum seven months ago, the growing consensus “among their portfolio managers is that we’re in a higher-for-longer interest rate environment.”
Back then, markets were pricing in repeated Fed rate cuts in 2024.
Instead, the Fed has held its finger “on the pause button, including last week.”
The Fed has gradually been “adjusting to the reality that rates will need to stay high for longer – not only in the short term but also further out.”
BlackRock pointed out:
“That’s illustrated by the gradual upward revision of its own estimate of long-run interest rates. Market pricing has adjusted accordingly. … The European Central Bank’s move to cut rates earlier this month with growth improving, inflation still above target and unemployment at a record low did not mark the start of a deep rate-cutting cycle, in our view.”
According to BlackRock analysts/researchers:
“The same will be true of the Fed if it starts to ease later this year, we think.“
BlackRock’s update further noted:
“We see central banks forced to keep interest rates higher than pre-pandemic to tackle persistent inflationary pressures. The new macro regime is marked by higher inflation, higher rates and lower growth due to supply constraints. We see this unprecedented macro cocktail persisting. Population aging, the rewiring of global supply chains and the low-carbon transition are constraining production and driving capital investment as economies try to adapt.”
They continued:
“Capital spending on AI data centers has boomed since last year’s ChatGPT moment. A lot more is coming in the years ahead. This capex boom and draw on resources could create bottlenecks, meaning AI will likely be inflationary in the near term before unlocking any of the longrun benefits that could ease inflationary pressures. This nuance is not appreciated by markets or central banks, in our view.”
They added:
“Where do markets go from here? We believe the most likely scenario is a concentrated group of AI winners driving returns over a tactical horizon of six to 12 months. We stay overweight tech and the AI theme. The AI rally is supported by earnings and has more room to run, in our view. We don’t see an AI bubble, and the profitability of mega-cap tech companies stands in contrast to the unprofitable companies driving the dot-com bubble.”
BlackRock concluded:
“Our risk-on stance leads us to prefer equities over fixed income, but we like the short end for income.”