BlackRock Report Raises Questions About Corporate Profits

In an investment outlook published on June 28, BlackRock’s iShares unit highlighted profitability as a key concern for investors across the board in the second half of the year. 

“Corporate profitability coming into question as firms grapple with higher input costs, which means focusing on companies with strong balance sheets, and margin resilience remains paramount,” Gargi Pal Chaudhuri, head of iShares investment strategy covering Americas, wrote in the report.  

Its forecast resonates with the latest outlook and research from the Federal Reserve, including its chairman’s careful policy comments on Wednesday and warnings from its research team about the long-term risks of these policies. 

Speaking at a central bank forum in Portugal on Wednesday, Federal Reserve Chairman Jerome Powell reasserted plans to continue to fight inflation, raising the likelihood of interest rate hikes later this year. 

“Inflation has proven to be more persistent than we expected and not less,” he said, according to CNBC, while acknowledging risks and noting the possibility of a “downturn.” 

Earlier this month, Fed economists warned about the impact its long-term inflation fight is likely to have on the economy, particularly the “firms in distress.”  

“The current environment characterized by a high share of firms in distress and a restrictive monetary policy stance may contribute to a marked slowdown in investment and employment in the near term,” the Fed researchers said in a note published on June 23. “The share of nonfinancial firms in financial distress has reached a level that is higher than during most previous tightening episodes since the 1970s.” 

They expect the impact on these companies to be noticeable in 2023 and 2024, estimating 37% of firms could be vulnerable. 

Mitigating Uncertainty 

The iShares research team also highlighted the use of exchange-traded funds in mitigating risks and planning for the second half of the year in an environment of “widespread uncertainty around the lagged impacts of monetary policy, quantitative tightening and credit conditions.” 

To mitigate these risks, iShares’ research team advised focusing on a handful of themes and tested strategies: dividend growth, quality-tilted growth stocks and a minimum volatility factor to weather upcoming storms.  

The report highlighted the iShares Core Dividend Growth ETF (DGRO), the iShares MSCI USA Quality Factor ETF (QUAL) and the iShares MSCI USA Min Vol Factor ETF (USMV), among others. 

“We believe that this is an investment regime where nimble asset allocation and a willingness to tweak portfolio positioning to adjust to the macro data is prudent,” they noted. “ETFs can be an important tool to do so efficiently.”  
 

Contact Daria Solovieva @[email protected]