The world’s largest wealth manager just downgraded its outlook for the stock market

BlackRock (BLK) has downgraded its outlook for equities amid rising economic uncertainty and persistent inflation.

Strategists at BlackRock’s Investment Institute said on Monday that the company had reduced its exposure to developed market equities, citing central banks’ aggressive intervention to curb rising prices in the global economy.

“Right now, we believe the Fed has contained itself by responding to political pressure to curb inflation,” strategists led by Jean Boivin said in a statement released on Monday. “Finally, we believe the damage to growth and jobs of fighting inflation is becoming apparent and central banks will live with higher inflation.”

BlackRock’s assets under management surpassed $10 trillion at the end of last year, making it the largest wealth management firm in the world.

In a similar comment last month, BlackRock strategists argued that the US Federal Reserve’s rate-hiking campaign would stall economic growth without necessarily easing inflationary pressures. The company argued the high core inflation was due to “abnormally low manufacturing capacity in an incomplete post-pandemic restart” rather than overheating in demand.

As a result of its downgraded rating on equities, BlackRock also said that traditional 60/40 equity-bond portfolios and “buying the dip” — or knee-jerkly buying stocks after a short-term decline — are likely no longer effective investment strategies. The company said it increased its allocation to investment-grade bonds while reducing its exposure to equities.

“We are seeing a new era of volatile inflation and growth sweeping aside a period of moderation,” the company said in a comment on Monday. “In this new regime, we downgrade stocks and upgrade loans.”

The revised outlook comes just over a week after stocks ended their sharpest first-half decline in more than five decades.

For the first six months of the year, the S&P 500 entered a bear market, and this downturn has prompted other notable Wall Street institutions to cut their price target on the benchmark index.

A trader works on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., June 22, 2022. REUTERS/Brendan McDermid

A trader works on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., June 22, 2022. REUTERS/Brendan McDermid

Among the companies that lowered its outlook for equities was Credit Suisse, whose chief US equity strategist Jonathan Golub cut his year-end estimate for the S&P 500 by 600 points to 4,300 in a July 5 client note. Although the new target implies a rally for the remainder of 2022, the number marks a significant reversal from a December 2021 research report in which the bank raised its target for the US benchmark index to 5,200 from 5,000 and cited “robust” economic growth. The S&P 500 ended Friday’s trading session at 3,899.

Even the most optimistic strategist on the street appears less than optimistic.

Oppenheimer Asset Management’s chief investment strategist, John Stoltzfus, lowered his year-end price target for the S&P 500 to 4,800 from 5,330 on Thursday. Prior to the change, Stoltzfus held the highest year-end price target for Wall Street strategists tracked by Yahoo Finance, even reiterating the claim as recently as June 21.

Meanwhile, Citigroup (C) strategist Scott Chronert said in a note to clients Monday he sees the S&P 500 up about 8% from current levels to end the year at 4,200 points.

“We have reduced most developed market equities to a tactical underweight,” BlackRock said, attributing the downgrade to increased macro volatility as “central banks seem intent on containing inflation by suppressing growth,” BlackRock said .

Still, the institution reiterated that it favors equities over bonds over the long-term as yields rise and inflationary tendencies rise.

“We believe that central banks will live with higher inflation, pause and then reverse the course of their rate hikes – a boon for equities,” the strategists said.

Alexandra Semenova is a reporter for Yahoo Finance. Follow her on Twitter @alexandraandnyc

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