Equity market will grow regardless of rate cuts: Strategist

US equities (^DJI, ^IXIC, ^GSPC) appear uneasy, trading lower ahead of Tuesday's market open as economic data in the form of the ISM's manufacturing PMI (Purchasing Managers' Index) came out hotter-than-expected. Markets are also abuzz with high anticipation for Friday's jobs data for the month of March. With the macro backdrop uncertain for the second quarter, some investors may be looking for new entry points to balance their portfolios.

BlackRock Americas iShares Investment Strategy Head Gargi Chaudhuri joins Yahoo Finance to break down what to expect with the upcoming jobs data, taking a look at the Federal Reserve's potential policy decisions for late 2024, and gives insight into the economic backdrop investors should be considering.

In terms of whether or not the equity market can do well regardless of interest rate cuts, Chaudhuri states: "Looking at healthcare, looking at tech, looking at communication services, those areas of the market that have stable earnings growth, looking at something like our QUAL ticker has done well in regimes off lower interest rates and higher interest rates. And that's very much an earnings growth story. So to the extent that AI still remains something that we are focused on and we expect that to be the case, to the extent that there is free cash flow that can be put back into research and development, that allows for that earnings growth to remain pretty consistent and I think that can allow quality parts of the market to do well."

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

Editor's note: This article was written by Nicholas Jacobino

Video transcript

JARED BLIKRE: Just at first blush, what's going on with the economic data? The ISM a bit higher than expected and expansion territory. We'll get some key labor market data today and also Friday. What's going on?

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

JARED BLIKRE: Thank you.

GARGI CHAUDHURI: I love it. So on your point around the data, look, I think we're beginning to see a little bit of softening on the manufacturing side. Obviously, we want to see that. I wouldn't read too much into any single data point.

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

Obviously, with JOLTS later today and with payrolls later this week, I think what we should continue to focus on is the type of moderation that's taking place and what the overall picture is saying, not just one print. For JOLTS in particular, I think looking at the vacancy-to-unemployment rate that something that the Fed has focused on, I think that will be really important as well.

BRAD SMITH: I'm looking here at your iShares spring 2024 investment directions. And the base case here, you're saying, is that the Fed engineers a soft landing, starts to cut rates in the second half of the year. The downside risks though to economic growth, do you think they've diminished to this point here?

GARGI CHAUDHURI: No, I think the base case still remains that they go three times this year. I will say that right now, the risk is more that they can only deliver maybe two, as opposed to four, which is where many investors-- four or higher, which is where many investors were, and the market was, coming into this year. So I think if we continue to see inflation remaining sticky, and I actually don't think it's so much around the growth dynamic.

I think Chair Powell made it very clear that even if unemployment rate continues to move lower, that it will be OK as long as inflation is moving down. So I think watching how sticky inflation and wages. And again, looking on Friday's data for wages will be super important. I think that's what's going to drive at least the bond market going forward.

BRAD SMITH: Can the equity markets still attain new all-time highs, notch new all-time highs, even if we see less cuts than anticipated coming into the start of this year?

GARGI CHAUDHURI: Yeah. And I actually, you know, if you look at our research on ishares.com, that is one of the things we talk about-- the quality parts of the market. So looking at health care, looking at tech, looking at communication services, those areas of the market that have stable earnings growth, looking at something like our QUAL ticker has done well in regimes of lower interest rates and higher interest rates.

And that's very much an earnings growth story. So to the extent that AI still remains something that we are focused on, and we expect that to be the case, to the extent that there is free cash flow that can be put back into research and development, that allows for that earnings growth to remain pretty consistent. And I think that can allow quality parts of the market to do well.

JARED BLIKRE: Do you think that AI is really changing the structure of the market, how it responds to data? I was just remarking just a few minutes ago that we have the 10-year T-note yield at a 2024 high, but we saw tech leading yesterday. It's down today. But I'm just wondering, and you allude to some of this in the research that you published, that after ChatGPT, we've actually seen a decline in value with respect to growth. And maybe that's a little bit of a head scratcher.

GARGI CHAUDHURI: Yeah, I think that the same playbook that we have used historically cannot necessarily be used again in this environment, where things like AI, and it can be other things such as the advent of GLP-1 drugs, the impact that they have on the markets in terms of the conduciveness to growth, productivity in the medium term, I think that cannot be underestimated. So when investors are thinking about where to go, you have to think about the drivers of earnings growth, where the cash flow is available, in addition to what our interest rate is doing.

I think the old playbook of 10-year treasury yields higher, and therefore growth declining, cannot be used anymore. And that's also why, in addition to looking at things like quality, we also think investors should take a more active, a more hands-on approach to managing their portfolio when there are so many countercurrents in the markets.

BRAD SMITH: I'm going to make our producers eyes roll back to the back of their heads when I say this next question here. Because, I mean, it is something that comes up time and time again, but we haven't been able to discuss it yet. The election year that is worldwide, not just here in the US, and more than half the global population heading to the polls or expected to vote or participate in elections. What type of event does that create for the markets?

GARGI CHAUDHURI: I think that creates an event in the markets that is the one that we have been pointing out, is somewhat higher volatility, more dispersion, ripe opportunities for active management, right opportunities for picking your sectors and your industries very carefully, and also picking where in the credit curve, when we look at the fixed income markets, you want to go to. So I think that it's very easy to say, oh, just stay invested. But recognizing that volatility will create opportunities as we go into elections, not just here in the US, but certainly in India and the rest of the world as well.