Equity market will grow regardless of rate cuts: Strategist

US stocks (^DJI, ^IXIC, ^GSPC) seem restless, trading lower ahead of Tuesday's market open as economic data in the form of ISM Manufacturing PMI (Purchasing Managers' Index) It came out hotter than expected. Markets are also full of anticipation for the March employment data to be published on Friday. With the macroeconomic backdrop uncertain for the second quarter, some investors may be looking for new entry points to balance their portfolios.

BlackRock Americas iShares Investment Strategy Director Gargi Chaudhuri joins Yahoo Finance to break down what to expect with upcoming jobs data, discuss potential Federal Reserve policy decisions for late 2024, and provide insight into the economic backdrop that investors should consider.

In terms of whether or not the stock market can do well regardless of interest rate cuts, Chaudhuri says: "If you look at healthcare, technology, communication services, those areas of the market that have stable growth of the benefits, we consider something as our CAL ticker It has done well in lower and higher interest rate regimes. And that's very much an earnings growth story. So to the extent that AI continues to be something that we focus on and hope to be, to the extent that there is free cash flow that can go into research and development, that will allow earnings growth to be keep up. pretty consistent and I think that can allow the quality parts of the market to perform well.”

For more expert insights and the latest market action, click here to watch this full episode of Morning Brief.

Editor's Note: This article was written by nicolas jacobino

Video transcript

JARED BLIKRE: At first glance, what is happening with the economic data? The ISM a little higher than expected and expansion territory. We'll get some key labor market data today and also on Friday. What is happening?

GARGI CHAUDHURI: Yes. Hello, good morning. It's great to be here in your beautiful new studio.

JARED BLIKRE: Thank you.

GARGI CHAUDHURI: I love it. So to your point on the data, look, I think we're starting to see a little bit of weakening on the manufacturing side. Obviously, we want to see that. I wouldn't put too much weight on any data point.

I think we should take the entire data. And as we noted in our spring investment guide just released this morning, what we've discovered over the course of the last three months is that growth is surprising to the upside, more than we thought it would when we were sitting in December 2023. What I also think is important is to pay attention to the labor market.

Obviously, with JOLTS later today and payrolls later this week, I think we need to continue to focus on the type of moderation that's taking place and what the big picture says, not just one impression. For JOLTS in particular, I think if we look at the vacancy rate versus unemployment, something that the Fed has focused on, I think that will also be very important.

BRAD SMITH: I'm looking here at iShares investment directions for spring 2024. And the base case here, you're saying, is that the Fed designs a soft landing and starts cutting rates in the second half of the year. However, do you think the downside risks to economic growth have diminished to this point?

GARGI CHAUDHURI: No, I think the base case is still that they go three times this year. I will say that right now the risk is greater, that they can only offer maybe two, instead of four, which is where many investors, four or more, which is where many investors were, and the market was, going into this. year. So I think if we continue to see inflation remain sticky, I actually don't think it's going to be so much due to growth dynamics.

I think Chairman Powell made it very clear that even if the unemployment rate continues to go down, everything will be fine as long as inflation continues to go down. That's why I plan to look at how sticky inflation and wages are. And again, it will be very important to look at Friday's salary data. I think that's what will drive at least the bond market going forward.

BRAD SMITH: Can stock markets reach new all-time highs, reach new all-time highs, even if we see fewer cuts than anticipated earlier this year?

GARGI CHAUDHURI: Yes. And in fact, if you look at our research at ishares.com, that's one of the things we talk about is the quality parts of the market. So if we look at healthcare, technology, communication services, those areas of the market that have stable earnings growth, something like our WHICH indicator has performed well in lower and higher interest rate regimes.

And that's very much an earnings growth story. So to the extent that AI continues to be something that we're focused on, and we hope that it is, to the extent that there is free cash flow that can go into research and development, that will allow for earnings growth. It's still pretty consistent. And I think that can allow the quality parts of the market to do well.

JARED BLIKRE: Do you think AI is really changing the structure of the market and how it responds to data? Just a few minutes ago I commented that we have the yield on 10-year Treasury bonds at a maximum of 2024, but yesterday we saw that technology was leading. It's down today. But I wonder, and you allude to some of this in the research you published, that after ChatGPT, we've actually seen a decline in value relative to growth. And maybe that's a little painful.

GARGI CHAUDHURI: Yeah, I think the same playbook that we've used historically can't necessarily be reused in this environment, where things like AI, and it may be other things like the advent of GLP-1 drugs, the impact that they have on I think that the capacity of markets in terms of promoting growth and productivity in the medium term cannot be underestimated. So when investors think about where to go, they have to think about the factors driving earnings growth, where cash flow is available, as well as what our interest rate is doing.

I think the old playbook that 10-year Treasuries yield more and therefore growth slows is no longer applicable. And that's also why, in addition to looking at things like quality, we also believe investors should take a more active and hands-on approach to managing their portfolio when there are so many headwinds in the markets.

BRAD SMITH: I'm going to make our producers roll their eyes when I say the next question here. Because it's something that comes up again and again, but we haven't been able to discuss it yet. Election year is a global one, not just here in the US, and more than half of the world's population is going to the polls or expected to vote or participate in elections. What kind of event does that create for the markets?

GARGI CHAUDHURI: I think that creates an event in the markets that is what we have been pointing to: somewhat greater volatility, more dispersion, ripe opportunities for active management, adequate opportunities to choose your sectors and industries very carefully, and also choose where in the market. credit curve, when we look at the fixed income markets, we want to go. So I think it's very easy to say, oh, just stay involved. But recognizing that volatility will create opportunities as we get closer to the elections, not just here in the United States, but certainly in India and the rest of the world.

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