While US stock markets have suffered their biggest year-to-date losses in decades, BlackRock has indicated that it will not be taking the opportunity to ‘buy the dip’.
In a weekly note from the BlackRock Investment Institute, the world’s largest asset manager said it was neutral on stocks over the next six to 12 months.
This view, BlackRock said, boiled down to three main reasons, including increasing downside risks for profit margins in the future.
“We expect the energy crunch to hit growth and higher labour costs to eat into profits. The problem — consensus earnings estimates don’t appear to reflect this,” the firm said.
“For example, analysts expect S&P 500 companies to increase profits by 10.5 per cent this year, Refinitiv data show. That’s way too optimistic, in our view. Stocks could slide further if margin pressures increase.”
BlackRock said that falling costs including labour had fed the multi-decade profit expansion, but noted that unit labour costs had not yet risen significantly.
The firm predicted that real wage hikes will be used to entice people back to work in a move it said would be good for the economy but bad for margins.
“Companies have managed to expand margins over the years through automation and other means, including in the pandemic. Now, challenges are mounting,” BlackRock said.
“We see easing consumer demand as the restart of economic activity slows. This will reduce companies’ ability to pass on higher costs to consumers, in our view.”
A rotation of consumer spending away from goods and back towards services is also expected by BlackRock, which it said would be more beneficial for the economy than for equities.
The second main reason cited to not ‘buy the dip’ cited by BlackRock relates to the firm’s view that equities have not cheapened by much to date.
“Valuations haven’t really improved after accounting for a lower earnings outlook and a faster expected pace of rate rises. The prospect of even higher rates is increasing the expected discount rate. Higher discount rates make future cash flows less attractive,” it said.
Finally, BlackRock pointed to the increasing risk that the US Federal Reserve will tighten rates too much, or that markets will believe that it will, in response to signs of persistent inflation.
“We don’t see a sustained rally until the Fed explicitly acknowledges the high costs to growth and jobs if it raises rates too high. That would be a signal to us to turn positive on equities again tactically,” the firm noted.
Inflation is set to remain higher than pre-COVID levels, BlackRock predicted, as central banks choose to live with inflation rather than raise rates to such a level that wipes out growth.
The firm said it expects the Fed will raise rates quickly then wait to see the impact, but noted it was unclear when it and other central banks would make a dovish pivot to save growth or avoid a deep recession.
“This uncertainty is why we’re tactically neutral on stocks but overweight on a strategic, or longer-term horizon. We think the sum total of rate hikes will be historically low,” BlackRock concluded.
