Here are 3 reasons why it isn't time to buy the dip in stocks yet and what needs to happen for the market to turn positive, according to BlackRock

According to a Monday note, investors shouldn't rush to buy the dip with stocks falling into bear market territory.

Since the beginning of the year, investors have grappled with rising inflation, higher interest rates, and mounting concerns of a recession, sparking a 21% and 30% decline in the S&P 500 and Nasdaq 100, respectively.

While some may see the damage and assume markets have priced in the risks, there are still growing uncertainties related to the Fed's interest rate plans and that could be a roadblock for stocks to recover from their recent losses.

There are three reasons why BlackRock isn't buying the decline in stock prices yet.

This is the first thing. There are risks to earnings.

For the last 20 years profit margins have marched upward. Increasing risks to the downside are now seen by us. The energy crunch is expected to eat into profits. The problem is that the estimates do not reflect this.

Wall Street still expects the S&P 500 to grow at a rate of 10.5%. "That's too optimistic," the investment bank said. If margin pressures increase, stock prices could fall further. The multi-decade profit expansion has been caused by falling costs. Unit labor costs have not gone up much. Wage hikes make it easier for people to return to work. It's good for the economy but bad for company margins.

BlackRock

There are two The Fed will raise rates too much.

We aren't buying stocks right now because we don't think the Fed will tighten too much in the near term. The latter risk may be caused by signs of persistent inflation.

There are three. Given rising interest rates, valuations aren't much cheaper.

In our opinion, equities have not cheapened that much. What's the reason? After accounting for a lower earnings outlook, valuations haven't really improved. The discount rate is going to increase if the rates are even higher. Future cash flows are less attractive due to higher discount rates.

There is a signal to look for.

When the Fed explicitly acknowledges the high costs to growth and jobs if it raises rates too high, the $10 trillion asset manager is watching to turn more positive on the stock market.

As it would likely signal that the central bank is done or almost done raising interest rates, it would signal to BlackRock to turn positive on the stock market. When interest rate cuts come back into the conversation, it could be the turning point.

The Fed will raise rates and then hold off to see what happens. We believe that central banks will eventually make a dovish pivot to save growth. This is the reason why we are overweight in the long run.