BlackRock (NYSE:BLK), a global investment management corporation, has voiced concerns over an impending economic downturn that could significantly impact stocks due to earnings stagnation, inflation, and high interest rates. The firm's strategists argue that despite investors adapting to increased market volatility, stocks haven't fully accounted for the expected macroeconomic damage. This warning comes amid an ongoing sell-off in the S&P 500 and the 10-year Treasury yield surpassing 5%, signaling a shift from Wall Street's traditional investing playbook.
The Q3 reporting season has started on a promising note with a FactSet report revealing that 73% of S&P 500 firms are outperforming analysts' estimates. However, BlackRock remains cautious, pointing out that broad equities are not fully reflecting the anticipated macroeconomic damage. The firm attributes half of the expected earnings growth to mega-cap tech stocks driven by Wall Street's enthusiasm for AI.
Over the past 18 months, BlackRock has identified a "stealth stagnation" in the US economy characterized by weak income and profits despite robust consumer spending and GDP growth. The firm warns of additional risks to earnings from resurgent inflation and a weakening labor market.
In response to these inflationary pressures, BlackRock expects the Fed to maintain higher-for-longer interest rates leading to increased expenses for companies. This expectation is supported by the CME FedWatch tool which indicates a 98% chance that rates will remain above 4% by the end of next year.
In light of these challenges, BlackRock advises investors to focus on mega forces such as AI, geopolitical fragmentation, and an aging global population. The firm suggests that these areas may offer opportunities for growth even in the face of the anticipated economic downturn.
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