Stocks look 'resilient' as investors pour $120 billion into equity ETFs in the face of rising rates, BlackRock says

• Inflows into equity ETFs of $120 billion are outpacing inflows to bond ETFs, BlackRock said in a note Monday.
• Stocks and bond yields generally have been moving higher simultaneously as the US growth picture improves.
• Value and cyclical stocks are finding favor among investors, said the asset manager.

Inflows into the equity market are strong despite the spike up in rates as investors respond to economic growth prospects by embracing risk and not staging a "taper tantrum", BlackRock said in a note Monday.

Equity exchange-traded funds have raked in $120 billion so far this year, outpacing inflows into fixed income ETFs by 4:1, according to iShares data outlined by Gargi Chaudhuri, head of US iShares markets and investments strategy at BlackRock.

That rush of investor cash into equities has taken place at the same time that Treasury bond yields have made notable moves higher, including a jump past 1.5% on the 10-year yield last week.

"That's not because the stock and bond markets have become untethered, but rather because rates are moving for the right reason: stronger U.S. growth," wrote Chaudhuri in the note, describing equities as "resilient".

Economists have broadly been increasing their forecasts for economic growth as vaccinations to prevent COVID-19 continue to accelerate. Meanwhile, House representatives in Washington last week passed a proposed $1.9 trillion stimulus bill, sending it to the Senate for approval. The US economy in 2021 could grow by the most in decades, said John Williams, president of the Federal Reserve Bank of New York, last week.

"Unlike previous bouts of rising rates (like the Taper Tantrum of 2013), equity investors have generally responded with risk-on reallocations into pro-cyclical exposures this time around," said Chaudhuri.

The response by investors could also be explained by real rates remaining "extremely accommodative" at around -70 basis points after the recent rise, she added. Real interest rates exclude the effects of inflation.

ETFs skewed towards value and cyclical stocks will keep benefiting as rates continue to rise and the yield curve steepens, Chaudhuri said, "with over $8 billion of ETF inflows to the value factor corroborating this view." The inflows of $8 billion represent nearly as much as the previous six months combined, BlackRock said.

Meanwhile, earnings forecasts for 2021 and 2022 should increase through the spring and summer, "further cushioning in the impact of the rise in Treasury yields," said Ian Shepherdson, chief economist at Pantheon Macroeconomics, in a Monday note.

Shepherdson said the spread between Treasuries and the S&P 500 earnings yield recently fell to 115 basis points after widening by 363 basis points at the peak.

"A narrower spread is no guarantee of future equity gains, but it ought to provide of measure of comfort," he wrote.

This article and headline has been corrected from an earlier version that said $8 billion has flowed into ETFs this year. That figure refers to inflows into value stock ETFs. The correct figure for year-to-date inflows into ETFs is $120 billion.