Market Expectations Of Fed Cuts Are "Exaggerated," And BlackRock Predicts a Surge In Volatility In 2024

However, despite this, the largest asset manager in the world, BlackRock (BLK.N), continues to see opportunities in AI stocks and technology equities, especially in the memory sector, due to so-called quality factors including consistent earnings and high margins. Notwithstanding a modest underweight position in U.S. equities as a whole, the firm maintains a favourable stance on sectors including healthcare and industry.

"In our opinion, market pricing for rate cuts is a bit exaggerated," said BlackRock's global chief investment strategist, Wei Li. "Rate volatility is here to stay."

According to the CME's FedWatch Tool, markets presently account for a probability of over 50% that benchmark rates will decline by more than 125 basis points by December of next year. In the past month, benchmark 10-year Treasury yields have decreased by over 80 basis points in response to labour market weakness and indications of inflation slowing. This has contributed to a recovery in U.S. equities, as evidenced by the S&P 500 (.SPX) surpassing its highest level since 2023 last week. As of this writing, the index is up approximately 19% for the year.

Shifting interest rate assumptions in 2024 will likely result in a "windscreen wiper market," according to Tony DeSpirito, global chief investment officer of fundamental equities. During this period, various sectors will experience rapid fluctuations in popularity. He is especially optimistic regarding memory storage firms, which he predicts will be instrumental in the expansion of AI capability.

"At the bottom of a cycle that has the potential to become a super cycle, you are purchasing into memory," he explained.

The business maintains a bullish stance on short-term Treasuries, but warns that structurally higher inflation will impede a substantial decline in yields on longer-term bonds from their current levels. The firm advised investors to anticipate greater returns from yield rather than appreciation.

"Income is back in a meaningful way for investing for next year," according to Li.

The firm stated that it is optimistic about India and Mexico among emerging markets and has a general preference for assets in emerging markets over those in developed markets.

Although markets may be overly anticipating Fed rate cuts, the central bank has likely already reached its apex, according to senior investment strategist Kristy Akullian of the firm. This makes fixed income investments more alluring overall.

She stated, "The greatest risk is holding too much cash."