Investment Company's Earnings Hint at Rate Cuts: Stock Forecast

Key Points

• BlackRock just released its second-quarter earnings report, and investors can now tap into the bank's insights.
• Funds flowed to fixed-income and ETFs, but not each product is created equal, as they are tied to a bet on interest rates coming by September. 
• Others on Wall Street like the thesis that bonds and small-cap stocks will soon outperform the rest of the market.

When the so-called ‘masters of the universe’ give investors an inside look into their operations, this usually merits attention because these insights could be the difference between a market-beating year and a market-lagger one. Today, BlackRock Inc. NYSE: BLK has released its second quarter 2024 earnings and, by extension, the reports for its different business segments.

Investors should be particularly interested in how many funds flowed into and out of the asset manager’s business and pinpointing where these funds were invested. Investors don’t need a multi-million dollar net worth to access the same advice that BlackRock clients are getting today. Still, they need to spend time pouring through documents and presentations.

To save investors some time, a breakdown of the main trends within BlackRock will be presented, some of which reiterate the information relayed by other banks in the financial sector. Last week, commercial banks like Citigroup Inc. NYSE: C and J.P. Morgan Chase & Co. NYSE: JPM pointed to a weakening consumer state in the U.S. economy, with rising credit card delinquencies due to sticky inflation. But BlackRock may have just sent a beacon of hope for struggling consumers; here’s why.

BlackRock's Net Funds Flow Provides Crucial Market Evidence

Management led the start of BlackRock’s quarterly press release with the asset manager’s record asset under management (AUM) figures. BlackRock has reached $10.6 trillion this quarter, an annual jump of $1.2 trillion. But more important than the investment rate into BlackRock is where these funds were invested.

Out of the total $139 billion of net inflows for the first half of 2024, BlackRock reports that up to $83 billion were invested into the asset manager’s exchange-traded funds (ETFs) segment, with $35 billion going into fixed-income products. This is where investors should start paying attention.

Why? Because if BlackRock’s clients are buying into fixed-income products, the asset manager’s view is bullish on the probability of interest rate cuts being here by September 2024. According to the CME’s FedWatch tool, there is over 90% probability of cuts being made in September.

Because fixed-income products' prices move opposite interest rates, interest rate cuts will increase bond prices. Stanley Druckenmiller—the guy who traded shoulder to shoulder with George Soros—just sold out of NVIDIA Co. NASDAQ: NVDA to invest in bonds through the iShares 20+ Year Treasury Bond ETF NASDAQ: TLT.

Another one of his bets was to buy into the iShares Russell 2000 ETF NYSEARCA: IWM. Small-cap stocks are highly dependent on lower interest rates to expand their operations since they typically operate with higher debt levels on their balance sheets.

So, knowing that one of Wall Street’s most respected investors is going into bonds and small caps, and Wall Street’s biggest asset manager is advising its clients to do the same, should investors follow along, and if so, how?

How Investors Can Access the BlackRock Advantage for Free

When it comes to bonds, investors can simply buy the iShares bond ETF and call it a day. Still, there are advantages to being a retail investor with more flexible choices to put on a view. Because mortgage rates are also tied to national interest rates, these cuts could make mortgages cheaper and potentially throw them into higher demand.

Investors may consider a stock with this trend: SoFi Technologies Inc. NASDAQ: SOFI. With triple-digit earnings per share (EPS) growth prospects and other fundamental factors positioning the business for double-digit upside, it is one way for investors to catch the bottoming in mortgage financing.

Regarding small-cap stocks, investors can invest in the Russell 2000 ETF and match the performance that BlackRock clients pay thousands to access. They can also review a list of small-cap stocks to consider for their portfolio.

Some of these stocks may include Denny’s Co. NASDAQ: DENN, as Wall Street analysts now forecast 11.5% EPS growth, driving consensus price targets up to $11 a share. They dare the stock to rally by 54.3% from where it trades today.

More than that, retail investors may soon have access to the world of private equity, as BlackRock just acquired Preqin for 2.5 billion pounds, approximately 3.2 million US dollars. Through this addition, BlackRock will use data and analytics to broaden access to the alternative assets class. It isn’t too crowded right now and poses a potential opportunity for investors once it comes live.