- Market direction driven by Fed machinations
- Need for diversification and resilience in equity portfolios
- An underappreciated opportunity in healthcare stocks
Market overview and outlook
The first five months of the year marked the worst start for the S&P 500 since 1970 ― and the sixth worst back to 1928.* While caution is warranted, we believe the equity risk premium (ERP) continues to make a case for equities.
Stock valuations have come down, but company earnings remain solid. This keeps the ERP ― which compares the earnings yield on the S&P 500 to bond yields ― above its historical average. Our models suggest the 10-year Treasury yield would have to rise to 4% or earnings decline by more than 20% for the perceived “margin of safety” in stocks over bonds to disappear. Earnings will slow, but 20% is hard to imagine, even in a recession. The average earnings drop in prior recessions was 13%, with the Global Financial Crisis (GFC) skewing the results. See chart below.
All eyes on earnings
S&P 500 earnings decline in recessions, 1957-2020
Source: BlackRock Fundamental Equities, with data from Bloomberg as of June 2022. Earnings decline calculated for the S&P 500 Index of large-cap U.S. stocks starting from the earnings peak prior to the recession and ending with the recession period earnings trough. Recessions as defined by the National Bureau of Economic Research from 1957 to 2020. Indexes are unmanaged. It is not possible to invest directly in an index.
Playing offense through defense
While it is important to maintain a long-term lens, particularly when investing for long-term goals, it is also prudent to protect and position portfolios for the prevailing environment ― a key advantage of active management. Today’s uncertainty argues for a focus on stability and resilience.