Markets are still digesting the trade-off between stronger earnings growth and higher interest rates, BlackRock said in its latest weekly market commentary.
- Technology stocks have remained resilient despite mounting pressure from higher interest rates, BlackRock said, citing the strong earnings growth driven by the ongoing AI boom.
- The asset management company said that markets will now turn their attention to Federal Reserve Chair Kevin Warsh’s first policy meeting on Wednesday.
- The firm said that markets have shifted to pricing in the possibility of another rate hike as inflation remains sticky and economic growth continues to hold up.
BlackRock on Monday said it remains “overweight” on U.S. stocks despite rising interest rates and growing expectations of a rate hike from the Federal Reserve.
In its latest weekly market commentary, the asset management company highlighted strong earnings, particularly in the technology sector, as a reason for its optimism.
“Markets are still digesting the trade-off between stronger earnings growth and higher interest rates,” BlackRock strategists said in the commentary. “Solid tech earnings keep us positive on risk, for now.”
AI Earnings Growth Continues To Support Bull Case
Technology stocks have remained resilient despite mounting pressure from higher interest rates, BlackRock said, citing the strong earnings growth driven by the ongoing AI boom.
The firm said increasing AI investment and strong investor conviction have helped U.S. tech companies offset the valuation drag typically associated with rising rates.
BlackRock noted that while tech earnings have been particularly impressive, growing 52% year-over-year in the first quarter, beating analysts’ expectations and coming in nearly double the pace of the broader market, sustaining that pace will require continued investment.
Next Test: Rising Capital Needs
“Whether tech shares can keep doing so will depend not only on the durability of earnings momentum, but also whether we see a further acceleration of the AI buildout amid the constraints,” the strategists said.
BlackRock also noted growing capital requirements across the AI ecosystem, highlighted by SpaceX’s record-breaking IPO and OpenAI’s recent filing to go public. While increased equity issuance from major technology companies such as Meta and Alphabet could test investor demand for capital, the firm said that those funding needs reflect the scale of the AI opportunity rather than a weakening of its long-term fundamentals.
“We think market absorption of this supersized equity issuance is a real risk to watch but not on its own a reason to question the AI fundamentals,” it said.
All Eyes On Fed Meeting This Week
BlackRock said that markets will now turn their attention to Federal Reserve Chair Kevin Warsh’s first policy meeting this week.
The firm noted that markets have shifted from expecting multiple rate cuts earlier this year to pricing in the possibility of another rate hike as inflation remains sticky and economic growth continues to hold up as supply disruptions from the Middle East conflict have caused limited damage so far.
“We’re closely watching how Warsh frames the balance between growth and inflation and any changes Warsh signals on Fed communication, such as reducing reliance on forward guidance to signal how it might act on policy rates next,” the strategists wrote.
Meanwhile, at the time of writing, the SPDR S&P 500 ETF (SPY), which tracks the S&P 500 index, was down about 0.05% and the Invesco QQQ Trust ETF (QQQ) fell 0.18%. The SPDR Dow Jones Industrial Average ETF Trust (DIA) gained about 0.06%. Retail sentiment on Stocktwits around SPY and QQQ was in the ‘bearish’ territory, while it was ‘neutral’ for DIA.
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