The current rally in stocks is unsustainable due to the decline in corporate earnings and the Federal Reserve's continued interest rate hikes, according to the investment bank.
The S&P 500 has surged about 18% from its mid-June low as inflation showed signs of cooling and the Fed indicated that future interest rate hikes could be smaller than its recent 75 basis point hikes.
The worst of the stock market decline should not be seen as a sign that it is over.
The stock market jumped on the hope that the Fed would stop hiking soon. Inflation is expected to settle above pre- Covid levels.
There will be more interest rate hikes from the Fed. Consumers are shifting their spend away from goods and towards services.
We think the Fed will hike rates to levels that will stall the economy. As consumer spending shifts and profit margins contract, corporate earnings might weaken more.
The current makeup of the economy means that earnings results could weigh on stock prices in the future.
S&P 500 earnings are mostly made up of goods companies because consumer spending is shifting away from goods.
More than half of S&P 500 profits are expected to come from earnings tied to goods, compared to less than a third from services. The economy isn't the stock market's main focus. In the first half of the year, goods made up less than a third of the economy. The boom in services doesn't power the S&P 500's earnings as much as it does the economy.
As the country navigates production and labor supply constraints, spending could be poised for a decline.
S&P 500 earnings growth has ground to a halt when energy and financial sectors are not included, according to a calculation by Blackrock.
We are not following the rally. What's the reason? Market expectations for a dovish Fed pivot are too early. As the Fed is responding to pressure to tame inflation, we believe a pivot will come later. "We think the market's views on earnings are too optimistic."
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