Why BlackRock says the stock market’s big summer rally isn’t worth chasing

As US stocks tumble to start the new week, strategists in the research arm of the world’s largest fund manager weigh in with words of caution.

In a note released Monday by the BlackRock Investment Institute, they said they expect US corporate earnings to deteriorate and the Federal Reserve to raise interest rates to a level that will “stall the economic restart”, being given persistent inflation which is expected to settle above pre-COVID levels. They also called the stock market’s rally from the mid-June lows unsustainable.

Stocks were slightly higher on Monday at midday, reversing modest losses seen after U.S. data that missed forecasts and unexpected signs of slowing growth in China dampened investor sentiment. Financial markets have oscillated between two narratives – one in which easing inflation and slowing growth give the Fed the leeway it needs to reverse aggressive rate hikes, the other in which gains Persistently high prices coupled with a robust labor market compel policymakers to continue raising borrowing costs.

July’s downside surprise in the consumer price index gave stocks a boost and helped send the S&P 500 SPX,
+0.32%
and Nasdaq Composite COMP,
+0.44%
to their fourth consecutive week of gains on Friday. The S&P 500 jumped about 16% from its June low and retraced more than 50% of its bear market decline.

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“We don’t think the rebound in equities is worth chasing,” said strategists Wei Li, Beata Harasim and Tara Sharma, along with BlackRock Investment Institute deputy director Alex Brazier. “We believe the Fed will remain responsive to ‘the politics of inflation’, a chorus of voices calling on it to bring inflation under control. Our conclusion: The latest inflation reading is not enough to boost the Fed’s pivot we’ve been waiting for to lean toward equities.

Additionally, they said, consumer spending is shifting toward services and away from goods, the category that has benefited from the containment phase of the pandemic. This change “could affect equities”, according to BlackRock strategists: they note that goods-related earnings are expected to account for 62% of S&P 500 earnings this year, compared to 38% for services, as shown in the chart below . A services boom would fuel the economy more than S&P 500 earnings.

Sources: BlackRock Investment Institute, Refinitiv and US Bureau of Economic Analysis.

“The risk of disappointing results is one of the reasons why we are tactically underweight equities,” they said.

“S&P 500 earnings growth has essentially stalled, we calculate, if you exclude the energy and financials sectors. That’s down from 4% annualized growth last quarter, according to Bloomberg data. Additionally, we believe analysts’ earnings expectations are still too optimistic,” they wrote.

Wall Street strategists are divided on whether the stock market rally has continued its momentum, with those at JPMorgan Chase & Co. saying it still has legs and rivals at Morgan Stanley predicting stock prices will fall at the second semester.

On Monday morning, all three major U.S. stock indexes were down, though pockets of buyers could be found in S&P 500 value and growth stocks, as well as in the utilities, healthcare and health sectors. basic consumption. New York-based BlackRock managed $8.49 trillion in June.

Must know: Ready to cash in on this stock market race? A way out is about to take shape, believes this strategist.

Hear Carl Icahn at the Best New Ideas in Money Festival on September 21-22 in New York City. The legendary trader will reveal his take on this year’s market madness.

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