BlackRock downgrades U.S. stocks
Investors should seek abroad for the greatest chances as the U.S. economy’s rising momentum nears its top, according to BlackRock.
On Wednesday, the massive asset manager released its mid-year report and downgraded U.S. stocks to neutral, claiming that the reopening trade had largely played out in domestic markets and that economic recovery growth had peaked.
“We believe that a broadening restart has the potential to benefit cyclical shares and regions. “We are turning positive on European equities, upgrading Japanese equities to neutral – and downgrading US equities to neutral,” according to the report.
The stock market in the United States boomed in the first half of the year, with the S&P 500 rising 14.4 percent in six months. The broad market index also set seven consecutive record closing highs before falling slightly on Tuesday.
However, investors should be concerned about the possibility of an increase in interest rates as well as higher taxes, according to BlackRock, while noting that small caps could still outperform.
“In the short term, we believe that U.S. large cap equities are vulnerable to the risks of higher taxes and tighter regulations.” … We see opportunity in small- and mid-cap U.S. companies amid a vaccine-led domestic rebound in activity,” according to the report.
BlackRock’s call adds to Wall Street’s growing apprehension. Major firms’ strategists, including Morgan Stanley and Goldman Sachs, are warning that the market has reached its peak and is likely to move sideways or even reverse course in the coming months.
Some indicators of economic expansion, such as manufacturing data, have also suggested that the United States’ recovery has lost some traction, though growth remains above pre-pandemic levels.
On the U.S. market, BlackRock has an underweight rating. Treasuries are being purchased, and bond yields are expected to rise once more.
The oil situation
West Texas Intermediate crude futures hit a high of $76.98 per barrel, the highest since November 2014, after a meeting between OPEC and its allies failed to reach an agreement on production policy for August and beyond. Brent has reached its highest level since last year.
However, by the opening bell on Wall Street, both contracts had given back their gains and were trading in the red. Nonetheless, the drop does little to dampen oil’s blistering rally this year, which has seen WTI gain more than 50%. Analysts believe that rising demand, combined with supply constraints, will continue to drive up the price of oil, and thus energy stocks.
Bank of America believes Brent could reach $100 per barrel by the summer of 2022, and it does not have an underperform rating on a single stock in its oil coverage universe. In the future, the firm recommends that investors focus on companies that have the most exposure to the rise in oil prices due to limited hedging, such as Occidental and APA.
Due to commodity price volatility, energy companies typically seek to limit their exposure to price swings by buying and selling futures contracts. While this protects companies from price drops, it also means that the upside from oil’s recent surge may be limited.
“Looking ahead to 2022, hedging exposure is light across our broader sector coverage, so we expect those stocks that have lagged so far in 2021 to show the greatest relative improvement in earnings and cashflow,” BofA analysts led by Doug Leggate wrote in a recent client note. Exxon and Hess were also mentioned as top ideas in the energy sector.
Evercore ISI is similarly upbeat about the prospects for oil companies. The firm recently raised its price target on every single stock in its universe of integrated oil and exploration and production companies.
In a note to clients, the firm declared, “Upstream is back!” “After more than three years of cost cuts, portfolio upgrades, and rethinking the value proposition, E&Ps are well positioned to capture the near-term upside from commodity prices.”
Evercore’s Stephen Richardson added that with WTI above $70 per barrel, “almost everything works” for companies that can sustain capital expenditures, debt reduction, and shareholder returns. He singled out Diamondback Energy as one of the names most vulnerable to the rise in oil prices, describing the company — which he rates outperform — as a top idea in the exploration and production sector. This year, the stock of the Texas-based company has more than doubled.
EOG Resources and Devon Energy were also mentioned as top ideas by Richardson. “The E&Ps are more of a direct play on crude price than the Big Oils, with greater flexibility to adapt to the environment (for better or worse), and consensus forecasts have been playing catch-up for the better part of the year as the outlook for commodity prices and cash flows has gradually drifted higher,” the firm said.
Devon is also favored by analysts, who note that the company was the second-best performer in the S&P 500 during the second quarter. He particularly likes how the company has prioritized debt reduction.
“Can oil reach $100? Yes. Would you take a chance on it with a major? No. “You’d play it with Devon,” he said.
The S&P 500 energy sector is coming off its best first half-year performance on record, and it is by far the best-performing S&P group for 2021, up more than 40%.
When it comes to upstream companies in the United States, Goldman Sachs prefers buy-rated ConocoPhillips over neutral-rated EOG Resources.
The firm’s bull case for Conoco revolves around the company’s shareholder returns strategy, as well as its acquisition of Concho Resources, which the firm sees as accretive to returns and free cash flow.
Buy a Chinese IPO after Didi?
Didi’s stock has dropped more than 23% to below $12. Last Wednesday, the stock soared to $18 on its first day of trading, but it ended just above its $14 offering price. Stocks rose slightly on Thursday before falling slightly on Friday. Because stock trading in the United States was halted on Monday in observance of Independence Day, Tuesday’s decline in Didi represented Wall Street’s first opportunity to respond to the negative headlines that emerged following Friday’s close.
China’s security review was initially announced on Friday, two days after Didi’s IPO on the New York Stock Exchange. According to Reuters, China’s cyber regulator told app stores on Sunday to stop selling Didi’s app. The directive was issued after regulators discovered that Didi had illegally collected users’ personal information. Didi has stated that it intends to make changes in order to comply with Chinese data regulations.
The Wall Street Journal also reported on Monday that Chinese regulators suggested to Didi that it postpone its IPO plans and conduct a security audit of its network weeks before the NYSE listing.
′′[We are] at a crossroads,” Cramer said. “Does the Chinese government want business to come to China? Because if they wanted deals to come here, they simply ruined it. Any investment bank that says, ‘You know what, we need this business,’ I would question.”
Cramer wondered whether any of the deal’s underwriters — Goldman Sachs, Morgan Stanley, and JPMorgan — were aware of the information reported Monday by The Wall Street Journal before the IPO was completed for Didi in particular. JPMorgan Chase, Goldman Sachs, and Morgan Stanley all declined to comment on Cramer’s comments.
The host of “Mad Money” also stated that the Securities and Exchange Commission should be involved because “this is a disclosure issue.”
Didi was facing a publicly known antitrust investigation at the time of its IPO. According to the company’s offering prospectus, “claims and/or regulatory actions against us related to anti-monopoly and/or other aspects of our business may result in fines, restrictions on or modification of our business practices, damage to our reputation, and material adverse impact on our financial condition, results of operations, and prospects.”
Cramer has generally been skeptical of many Chinese firms, believing that investors were taking on a significant amount of geopolitical and accounting risk. He has, however, been a supporter of Didi, stating last week that “the valuation appears imminently reasonable.”
“If you want to speculate on a Chinese IPO, you have my blessing to bet on Didi,” he said on June 28, two days before the company went public on the NYSE.
“Would you ever buy another of these?” Cramer asked on Tuesday. … This seemed like a good company to me. I assumed they had the app, that it would continue to grow, and that eventually everyone would be using it.”
Shares of other Chinese companies listed in the United States, such as Tencent Music Entertainment, fell Tuesday morning as investors became concerned about the possibility of further Chinese government action.