Both the S&P 500 and Nasdaq Composite finished today in the red following a warning from BlackRock. The firm says it has reduced its exposure to “developed market equities” because of rising interest rates globally. Last year, BlackRock officially crossed the $10 trillion mark in assets under management (AUM).
Lead strategist Jean Boivin explained the following:
“Right now, we think the Fed has boxed itself in by responding to political pressures to rein in inflation […] Eventually, the damage to growth and jobs from fighting inflation will become obvious, in our view, and central banks will live with higher inflation.”
Growth stocks may be most at risks from rising rates. This is because many of these companies are currently unprofitable as they invest cash flow into marketing and research and development (R&D). These companies predict that they will generate cash flow down the line as a result of their investments. However, rising rates reduce the value of future cash flows when they are discounted back to the present value.
BlackRock Reduces Stock Exposure in Light of Rising Rates
Last month, BlackRock strategists noted that raising rates may lower economic growth without lowering inflation. Rather than an oversupply in demand, inflation could be attributed to “unusually low production capacity in an incomplete restart following the pandemic.”
Meanwhile, BlackRock also says that the traditional 60/40 stock-bond portfolio and the “buy the dip” strategy will likely be inefficient. Instead, the firm has lowered its equity exposure and purchased investment grade credit. BlackRock elaborated:
“We see a new era of volatile inflation and growth sweeping aside a period of moderation […] We downgrade equities and upgrade credit in this new regime.”
Still, there seems to be a light at the end of the tunnel. BlackRock strategists believe that the U.S. central bank will eventually “live with higher inflation.” Afterwards, it will change course on rate hikes, which will be a boon for stocks.
BlackRock isn’t the only firm to lower its outlook for the year. On July 5, Credit Suisse lowered its 2022 S&P 500 target to $4,300, down 600 points from the previous estimate. Back in December, the investment firm had raised its price target to $5,200 from $5,000, calling for “robust” economic growth.
Oppenheimer Chief Investment Strategist John Stoltzfus also recently lowered his 2022 S&P 500 price target to $4,800 from $5,330. Before the reduction, Stoltzfus held one of the highest 2022 S&P 500 price targets on Wall Street.
On the date of publication, Eddie Pan did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.