Wanting To Take Advantage of the Bear Market To Buy Stocks? BlackRock Gives You 3 Reasons To Wait.
The world's largest asset manager believes that the bottom has not yet been reached.
The S&P 500 is officially in a Bear Market, as it has fallen over 20% since its previous high in early 2022. Against this backdrop, you'll hear many people repeat, “Buy the Dip!”. The formula is well known, and it has proven itself in the past. It is indeed when fear grips the majority of market participants that you need to keep a cool head and seize the opportunities that present themselves.
However, there is a big question in the minds of those considering deploying capital in the stock market: Have we hit the bottom?
BlackRock, the world's largest asset manager, doesn't think so, and gives 3 big reasons why you'd better be patient:
1. Corporate profits are overvalued
“Profit margins have marched upward for two decades. Now we see increasing downside risks. We expect the energy crisis to affect growth and rising labor costs to reduce profits. The problem is that consensus earnings estimates don't seem to reflect this,” BlackRock said.
For now, the latest estimates call for 10% earnings growth for S&P 500 companies in 2022. “That's way too optimistic,” BlackRock explained. “Stocks could slide further if margin pressures increase. Lower costs like labor have led to earnings expansion over several decades. So far, unit labor costs have not risen much. We are seeing inflation-adjusted wage increases to get people back to work. That's good for the economy but bad for corporate margins.”
BlackRock is referring here to the wage-price spiral. Inflation feeds wage growth, which feeds inflation. In this way, purchasing power is protected, but at the expense of costs for businesses, which will ultimately likely pass that cost on to consumers. But this time lag creates a distortion. This is even more true in some European countries where there is automatic wage indexation, which makes companies in these countries less competitive than companies in neighboring countries that do not have such an automatic mechanism.
2. Fed will raise rates higher than expected
This is the big fear of the markets. The inflation figures for May, at 8.6%, were higher than estimated. This raises fears that the Fed will raise interest rates by 50 to 75 points for July 2022. A decision by the Fed is expected on June 15, 2022.
BlackRock, along with Barclays and Jefferies, is clearly among the pessimists on this issue and thinks it is best to wait: “We are not tapping the table to buy stocks at this time because of a growing risk that the Fed will tighten monetary policy too much - or that the markets believe it will, at least in the near term. Signs of persistent inflation, such as last week's CPI report, may fuel the latter risk.”
3. Stocks are still not cheap enough
“Stocks have not been that much cheaper, in our opinion. Why? Valuations haven't improved after factoring in the lower earnings outlook and the accelerated expected pace of rate hikes. The prospect of even higher rates increases the expected discount rate. Higher discount rates make future cash flows less attractive," BlackRock justifies.
Here's what to make of that last quote from BlackRock: stocks may soon become even cheaper.
BlackRock sees only one critical signal to start investing again in the long term: when rising interest rates create a real risk of recession and rising unemployment. At that point, the pressure on the Fed will become too great, signaling an end to rising rates, BlackRock believes.
Until then, BlackRock recommends patience. It's up to you whether you want to do the same or not.
Some reading
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