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BlackRock
Updated 19 May 2023
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Disclaimer

This is a non-independent marketing communication commissioned by BlackRock. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.

At the end of a difficult 2022, the US stock market showed brief signs of revival on hopes that inflationary pressures were finally easing. However, until a more permanent change in the Federal Reserve’s position, these are likely to be ‘speedbumps’ rather than a permanent change in direction. A focus on resilient companies, with quality characteristics is likely to remain crucial in navigating the year ahead.

Market action in the final months of the year reflected investors’ battle between ongoing fear and flashes of hope that the tough-talking Fed might be ready to ease its rate-hiking campaign. However, inflation still has a long way to go to move back to the Federal Reserve’s 2% target, and may not have peaked.

There are signs that the US economy is slowing: housing demand has dipped, while consumer confidence is also falling.1 This all points to an eventual decline in inflation. However, wages remain stubbornly high and job openings are also elevated.2 This is one element of “sticky” inflation that may make the retreat from peak inflation a slow one.

Against this backdrop, we view the recent periods of optimism among investors as bear market rallies rather than the start of a new bull trend. While history generally has been kind to markets in the year after a midterm election - our analysis shows that markets have not been negative after an election since 19383 – this time round, markets need to navigate recession.

We believe a recession is likely: the economic consequences of rate rises have not yet been felt in full. History also suggests that inflation above 5% is a recipe for recession.4 That said, we think any recession could be relatively shallow in depth and duration. The consumer - which accounts for nearly 70% of U.S. GDP5 - remains in relatively good shape, with low debt levels. This should support the economy from here.

Corporate resilience

This paints a picture of a difficult and uncertain market, but one that is not universally gloomy, particularly for active investors. As in prior recessions, dispersion in analyst earnings estimates is rising,6 which should see companies with fundamental strength assert themselves. Companies with strong balance sheets and cash flow are in a better position to defend themselves during a recession and to build market share.

In contrast, the influence of the top-five mega-cap stocks that have been dominating US index performance for the past several years may be waning. Their recent results have been, in aggregate, disappointing and there has been some “decoupling” between the top five and the broader market. Their dominance of the index is declining. The top five S&P 500 constituents represented a record high of 22% of the index’s total weight in August 2020, according to data from Refinitiv, and has been inching down since, sitting at just under 19% now.7

This is good news for active funds. The major averages are market-cap weighted, with index trackers benefitting from the strong returns in these dominant stocks in recent years and active funds have struggled to keep pace. However, stock pickers should have an advantage today. They can move away from these companies whose prospects now look weaker, instead focusing on those stocks with potential to generate stronger earnings growth.

The characteristics of individual companies are, we believe, likely to be more important in the year ahead. In the BlackRock Sustainable American Income trust, we continue to look for those companies with a clear pathway of growth, strong balance sheets and a growing dividend, believing these resilient companies will be rewarded in the year ahead.

1 https://www.forbes.com/sites/qai/2022/11/30/housing-price-index-slows-and-consumer-confidence-falls-as-potential-recession-inches-closer/?sh=746640b67b8d Fobes – 30 November 2022
2 https://www.cnbc.com/2023/01/04/workers-still-quitting-at-high-rates-and-getting-a-big-bump-in-pay.html - 4 January 2023
3 https://www.blackrock.com/us/individual/insights/taking-stock-quarterly-outlook#:~:text=rate%2Dhiking%20campaign.-,Election%20fog%20lifted,-History%20generally%20has – 15 December 2022
4 https://www.blackrock.com/us/individual/insights/taking-stock-quarterly-outlook#:~:text=About%20that%20recession – 15 December 2022
5 https://www.blackrock.com/us/individual/insights/taking-stock-quarterly-outlook#:~:text=The%20consumer%20(which%20accounts%20for%20nearly%2070%25%20of%20U.S.%20GDP) – 15 December 2022
6 https://www.blackrock.com/us/individual/insights/taking-stock-quarterly-outlook#:~:text=A%20growing%20active%20opportunity%3F – 15 December 2022
7 https://www.blackrock.com/us/individual/literature/investment-commentary/taking-stock-quarterly-outlook-en-us.pdf - 30 November 2022

Risk warnings

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.

Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.

Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time.

BlackRock Sustainable American Income Trust specific risks

This information should not be relied upon as research, investment advice, or a recommendation regarding any products, strategies, or any security in particular. This is for illustrative and informational purposes and is subject to change. It has not been approved by any regulatory authority or securities regulator.

The environmental, social and governance (“ESG”) considerations discussed herein may affect an investment team’s decision to invest in certain companies or industries from time to time. Results may differ from portfolios that do not apply similar ESG considerations to their investment process.

Exchange rate risk: The return of your investment may increase or decrease as a result of currency fluctuations.

Risk to capital through derivative use: The fund may use derivatives to aim to generate more income. This may reduce the potential for capital growth.

Capital Growth/Income variation risk: Investors in this Fund should understand that capital growth is not a priority and values may fluctuate and the level of income may vary from time to time and is not guaranteed.

Derivative risk: The Fund uses derivatives as part of its investment strategy. Compared to a fund which only invests in traditional instruments such as stocks and bonds, derivatives are potentially subject to a higher level of risk.

Gearing risk: Investment strategies, such as borrowing, used by the Trust can result in even larger losses suffered when the value of the underlying investments fall.

Important Information

In the UK and Non-European Economic Area (EEA) countries: this is issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel: + 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.

This document is marketing material. The Company is managed by BlackRock Fund Managers Limited (BFM) as the AIFM. BFM has delegated certain investment management and other ancillary services to BlackRock Investment Management (UK) Limited. The Company’s shares are traded on the London Stock Exchange and dealing may only be through a member of the Exchange. The Company will not invest more than 15% of its gross assets in other listed investment trusts. SEDOL™ is a trademark of the London Stock Exchange plc and is used under licence.

Net Asset Value (NAV) performance is not the same as share price performance, and shareholders may realise returns that are lower or higher than NAV performance.

The investment trusts [listed below/above/in this document] currently conduct their affairs so that their securities can be recommended by IFAs to ordinary retail investors in accordance with the Financial Conduct Authority’s rules in relation to nonmainstream investment products and intend to continue to do so for the foreseeable future. The securities are excluded from the Financial Conduct Authority’s restrictions which apply to non-mainstream investment products because they are securities issued by investment trusts. Investors should understand all characteristics of the funds objective before investing.

For information on investor rights and how to raise complaints please go to https://www.blackrock.com/corporate/compliance/investor-right available in local language in registered jurisdictions.

Any research in this document has been procured and may have been acted on by BlackRock for its own purpose. The results of such research are being made available only incidentally. The views expressed do not constitute investment or any other advice and are subject to change. They do not necessarily reflect the views of any company in the BlackRock Group or any part thereof and no assurances are made as to their accuracy.

This document is for information purposes only and does not constitute an offer or invitation to anyone to invest in any BlackRock funds and has not been prepared in connection with any such offer.

© 2023 BlackRock, Inc. All Rights reserved. BLACKROCK, BLACKROCK SOLUTIONS and iSHARES are trademarks of BlackRock, Inc. or its subsidiaries in the United States and elsewhere. All other trademarks are those of their respective owners.

MKTGH0223E/S-2691906

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