BlackRock, the world’s largest asset manager, has warned investors that stocks have not priced in the coming pain to the economy. The firm pointed to earnings stagnation, inflation, and high interest rates as the main pressures impacting equities.
According to BlackRock strategists, recent headwinds in the market, such as concerns over higher interest rates, have already impacted equities. The 10-year Treasury yield surpassed 5% on Monday, while the S&P 500 experienced its longest sell-off of the year. These events indicate that investors are adjusting to a new macro regime characterized by higher turbulence.
However, BlackRock believes there is more pain to come for stocks. The US economy is expected to slow down, and companies will face headwinds to their earnings. Despite expectations for a pickup in the third quarter reporting, BlackRock remains cautious. They argue that while broad equities have started to adjust to the new regime, they have not fully reflected the macro damage that is anticipated.
Although the earnings season has seen a strong start so far, with 73% of the S&P 500 firms that have reported beating analysts’ estimates, overall earnings growth has largely stagnated over the past year. Half of the expected earnings growth is attributed to mega-cap tech stocks that have rallied on Wall Street’s excitement for artificial intelligence.
BlackRock believes that expectations for broad equities are currently muted and overly optimistic. Additionally, the US economy has been in a period of “stealth stagnation” for the past 18 months, despite hot consumer spending, a strong labor market, and robust GDP growth. Resurgent inflation and a weakening labor market pose further risks to earnings. Prices are expected to follow a “rollercoaster” path, and demographic issues are leading to a shrinking workforce, limiting the economy’s ability to grow without stoking inflation.
The firm also highlighted that the Federal Reserve’s decision to keep interest rates higher-for-longer will weigh on stocks. Investors have already priced in a 98% chance that rates will remain above 4% by the end of next year. In light of these challenges, BlackRock advised investors to be selective in their investments and to focus on “mega forces” that are currently shaping the market, such as artificial intelligence, geopolitical fragmentation, and an aging global population.
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