Financials, the sector that has led the recent rally, still has more room to run, BlackRock strategists said Tuesday.
"I don't think we've seen the end to the bank stocks rally even though we've seen some consolidation in the near term," Kate Moore, chief equity strategist at BlackRock, said Tuesday at the firm's media presentation on the global investment outlook.
She cited several factors including a steepening yield curve — which improves banks' profit margins — "healthy balance sheets" and less regulatory pressure. In particular, Moore said, "this is a very constructive environment for regional banks."
Overall, medium-term gains for stock investors should be moderate, Moore said. Her "best-case scenario" for investors is a 4 to 6 percent return from a global diversified equity portfolio over three to five years.
BlackRock recommends owning emerging market and Asian equities, including Japan, and is neutral U.S. and European equities.
Isabelle Mateos y Lago, chief multiasset strategist at BlackRock, said growth fundamentals for emerging markets look solid, while the U.S. dollar — whose strength is a negative for emerging markets — shouldn't rise that much further despite the greenback's postelection gains to its highest in more than a decade.
The dollar climbed with Treasury yields, but she said further gains should be limited as the the impact from President-elect Donald Trump's fiscal policies is still uncertain, while the Federal Reserve will likely raise rates gradually and let inflation run for some time above its targets.
"That means it's not going to be a massive tightening of global financial conditions," she said. "This is in our view another factor that is quite supportive for ... emerging markets."
BlackRock turned positive on emerging market stocks in August, citing improving fundamentals and stability in commodity prices and the U.S. dollar.
The strategists also said their outlook on assets going forward was largely consistent with market trends that had begun ahead of the U.S. presidential election.
Financials were already a top performing sector in the weeks before the Nov. 8 election and accelerated gains to climb about 18 percent since.
"Some of what we've seen in terms of the outperformance of financials recently is investors just getting to neutral," Moore said.
Last week, Bespoke Investment Group said in a note that the stock sector still has far to go before recovering record levels.
"Financials dropped more than 80 percent during the financial crisis, while the energy sector fell 40 percent from mid-2014 through January of this year," the note said. "So while sectors like consumer discretionary and industrials have also rallied sharply higher since the election, they have exploded higher into new all-time high territory. Financials and energy, on the other hand, both still need to gain roughly 30 percent to get back to their prior all-time highs."