Despite the Dow, the Nasdaq, and S&P 500 hitting record highs this month, the co-founder of the world’s biggest money manager says the party is not over yet for the U.S. stock market.
Speaking on CNBC, the chairman and CEO of BlackRock, Larry Fink, stated that the stock market has plenty more headroom. Fink pointed to some of the recent better-than-expected earnings from leading U.S. corporations and the expected interest rate cut from the Federal Reserve as reasons for the continued equities boom.
“People are underinvested in equities … with the change of tone of central bank behavior and you’re starting to see corporate earnings coming in pretty well. We are still constructive on the world.”
Better companies = best world’s best stock market
Fink attributed the stellar performance of the U.S. stock market to the U.S. having “better companies” than other regions, adding that “we deserve it.” Fink also pointed out that a larger proportion of American savings was invested in the stock market compared to Asia and Europe. This was also responsible for the relatively higher price-to-earnings ratios of U.S. stocks.
Some of the firms that have released stellar results include the largest U.S. company by market capitalization, Microsoft. The software giant’s overall value now stands at $1.05 trillion.
Fink’s expectation of a rate cut has been bolstered by Federal Reserve Chairman Jerome Powell who earlier this week repeated a dovish pledge.
While noting that growth concerns had arisen over trade tensions, Brexit, and other geopolitical factors, Powell insisted that the Federal Reserve was monitoring the developments and will “act as appropriate to sustain the expansion.”
Is a 2019 interest rate cut all but assured?
On Thursday the head of the Federal Reserve Bank of New York and the vice-chairman of the Federal Reserve’s rate-setting committee, John Williams, also appeared to raise the prospects of a rate cut. Speaking in New York, Williams argued that it was imperative to be proactive and head off a recession rather than wait for it to set in:
“It’s better to take preventative measures than to wait for disaster to unfold. When you only have so much stimulus at your disposal, it pays to act quickly to lower rates at the first sign of economic distress.”
A spokesperson later “clarified” – or perhaps walked back – those remarks.
NY Fed's John Williams lays out the intellectual case for pre-emptive rate cuts. "When you only have so much stimulus at your disposal, it pays to act quickly to lower rates at the first sign of economic distress."
— Jeanna Smialek (@jeannasmialek) July 18, 2019
Williams’ dovish remarks were also echoed by Powell’s deputy, Richard Clarida who recently said that “you don’t have to wait until things get so bad to have a dramatic series of rate cuts.”
Target rates currently sit within a range between 2.25 percent and 2.5 percent, and there is, therefore, little wiggle room to revise rates downwards once an economic downturn has set in.
Nevertheless, CME’s FedWatch tool indicates a 100% chance of a rate reduction at the upcoming FOMC meeting, and there’s a growing chance rates will drop by 50 basis points.