Market expectations of Fed rate cuts ‘overblown’, says BlackRock

Global markets will experience increased volatility in 2024 as the Federal Reserve will cut interest rates fewer times than many investors anticipate, strategists at BlackRock Investment Institute said in a roundtable Tuesday.

However, BlackRock, the world’s largest asset manager, continues to see equity opportunities in AI and technology stocks, particularly in the memory sector, with opportunities also due to so-called quality factors, such as stable earnings and high margins.

The firm has a slight underweight in US equities as a whole, although it remains favorable in sectors such as industrials and healthcare.

“In our view, the market valuation of rate cuts is a bit exaggerated”said Wei Liglobal chief investment strategist at BlackRock. “Rate volatility is here to stay.”

Depending on the tool FedWatch According to CME, markets currently value the probability of benchmark rates falling more than 125 basis points by December of next year at more than 50%.

The yield on 10-year Treasury bonds has fallen more than 80 basis points in the past month, following signs of cooling inflation and labor market weakness, fueling a rally in U.S. stocks that led the S&P 500 to reach a 2023 closing high last week. The index has climbed almost 19% so far this year.

In 2024, changing interest rate assumptions will likely lead to a “windshield wiper market”, in which the different sectors will enter and exit the game quickly, according to Tony DeSpiritoglobal chief investment officer of fundamental equities. DeSpirito He is especially bullish on memory storage companies, which he believes will play a key role in the growth of AI capabilities.

“Memory is being purchased at the bottom of a cycle that has the potential to become a supercycle.”“, he claimed.

The firm remains bullish on near-term Treasuries, but cautions that it sees structurally higher inflation making it difficult for longer-term yields to fall significantly from current levels. Instead, investors should prepare to benefit more from profitability than appreciation, according to the company.

Among emerging markets, the company is optimistic about India and Mexicoand has a general preference for assets from these types of markets over those from developed markets.

Although markets may be expecting too much from the Federal Reserve’s cuts, the central bank has likely already hit peak rates, making fixed income more attractive overall, he said. Kristy Akulliansenior investment strategist at the firm.

He “biggest risk is holding too much cash“, said.