U.S. stocks have posted the biggest year-to-date losses since the 1960s, but investors should still stay away, according to the BlackRock Investment Institute.
Like the S&P (SP500) (NYSEARCA: SPY) and Nasdaq 100 (NDX) (QQQ) fall again today and Treasury yields (OTC) (TLT) surge, BlackRock remains neutral on equities over a six- to 12-month horizon, chief global strategist Wei Li wrote in a note on Monday.
Li described three reasons not to buy the dip.
Increased risk of lower profit margins
“We expect the energy crisis to hit growth and higher labor costs to eat into earnings,” Li said. “The problem: Consensus earnings estimates don’t seem to reflect that. “
“For example, analysts expect S&P 500 companies to increase earnings by 10.5% this year, according to Refinitiv data. This is far too optimistic, in our view. Shares could fall further if margin pressures increase. So far, unit labor costs – the wages a firm pays to produce a unit of output relative to its selling price – have not increased much.”
“We’re seeing real or inflation-adjusted wage increases to get people back to work,” she said. “It’s good for the economy, but bad for business margins.”
Stocks aren’t much cheaper
“Valuations haven’t really improved after factoring in a weaker earnings outlook and a faster pace of rate hikes,” Li said. “The prospect of even higher rates raises the expected discount rate .Higher discount rates make future cash flows less attractive.”
Growing risk that the Fed will tighten too much
“Signs of lingering inflation, like last week’s CPI report, may fuel this latter risk,” Li said. Stocks fell last week near year lows We don’t see a sustained recovery until the Fed explicitly acknowledges the high costs to growth and jobs if it also raises rates . high.”
“It would be a signal for us to get back positive on stocks tactically,” she added. “We see central banks ultimately choosing to live with inflation instead of raising policy rates to growth-destroying levels. This means inflation is likely to remain higher than pre-Covid levels.”
“We also believe the Fed will raise rates quickly and then wait to see the impact. The question is when will this dovish pivot take place. This uncertainty is why we are tactically neutral on equities but overweight on a strategy, or longer term, horizon. We believe the sum total of rate hikes will be historically low.”
See the argument that now may be the perfect time to bet on a Fed pause.