The likelihood of a U.S. recession happening in 2024 is under debate, but most economic forecasters agree that the Federal Reserve won’t hike interest rates next year. If anything, the Fed could lower rates in the second half of 2024. The soft landing might be achieved.
For that reason, investors should have modest expectations for the overall stock market, Tony DeSpirito, chief investment officer of global fundamental equities at BlackRock, said during a presentation Thursday at the headquarters of the world’s largest asset manager. However, DeSpirito and his colleagues don’t buy the whole market. They use bottom-up analysis to try and choose companies that will outperform and they are looking forward to 2024, a year that could be a bonanza for stock pickers.
“When I think about my degree of excitement for the market, I think returns probably [will be] in line with long-term historical averages. But when I think about the opportunity for alpha, that’s where I get really excited. The most excited I’ve been in 20 years,” DeSpirito said.
Given the macroeconomic environment, DeSpirito says quality, resilient companies are set to perform relatively well — especially from a risk-adjusted return perspective — in the near future. The only time that doesn’t happen is when an economy is coming out of a recession and growth is accelerating. “That’s not where we are today. And so I do think adding quality, adding resilience is important,” he said.
The fundamental equity group likes companies it often does: highly profitable businesses with high, stable gross margins, good return on capital, and strong balance sheets that may help them weather things like higher interest rates and economic downturns. But, of course, anyone can see those things in public company earnings, so asset managers have to decide if the price of their shares is worth it.
“We’re in a marketplace where there’s a really wide diverging range of valuations for various stocks. It is about as wide as you ever get. And so I do think, in terms of protection, being sensitive to the price you pay is just going to be extremely important,” DeSpirito said.
Quality stocks usually trade at a premium to the overall S&P 500 index. Right now, they are trading at a slight discount and valuation dispersion is two standard deviations higher than normal, he added.
Alpha, loosely defined as returns above what the market will provide, is going to be more important to clients in 2024 that promises continued volatility — a “windshield wiper market” and lack of trending — which DeSpirito said will mean more potential for active managers.
Artificial intelligence remains one of BlackRock’s mega trends and “probably the most important topic of the next decade,” DeSpirito said. He added that AI’s progress and impact can continue regardless of what overall markets are doing and it’s still evolving. Some stocks like Nvidia have already surged after recent AI advancements and developments but other companies still have potential for growth.
BlackRock says AI will require more and better hardware and cloud computing. There will be more large language models but also proprietary data sets that companies can leverage as well as whole new business models that remain to be seen.
“If you think about the [computer] memory market, it’s a very cyclical market, but it’s a growth cyclical. So up over time and we’re in a down cycle. When you think about it, you’re kind of buying into memory at the bottom of the cycle and we have the potential for a supercycle because of AI. I think that’s totally underappreciated by the market. That’s where stock pickers come in for example,” DeSpirito said.
Other companies across industries figuring out how to leverage AI could also use it to cut costs and free up capital for other things, potentially making them attractive companies to own.
“Is fixed income more attractive than it’s been in recent years? Yes,” DeSpirito said. “But let me tell you, long-term history tells you equities are going to do plenty fine in this environment.”
