Stock market valuations don’t “reflect future damage,” warns BlackRock

More pain for investors lies ahead in 2023, BlackRock’s strategy team warns.

In a new report, BlackRock says stock valuations don’t “yet reflect future damage.” The investment manager says he will “get positive on stocks” when he believes valuations fully reflect the “damage” on the horizon.

One of the report’s lead authors, strategist Wei Li, told Yahoo Finance Live (video above) that investors need to be on the lookout for several factors that could push the S&P 500 back towards October lows of around 3,600.

“We don’t expect rate-cutting cycles starting next year,” Li said of one factor that could disrupt equities in 2023.”

NEW YORK, NEW YORK - SEPTEMBER 23: Traders work on the floor of the New York Stock Exchange (NYSE) on September 23, 2022 in New York City.  The Dow Jones Industrial Average fell more than 400 points as recession fears mount.  (Photo by Spencer Platt/Getty Images)

Traders work on the floor of the New York Stock Exchange (NYSE) on September 23, 2022 in New York City. (Photo by Spencer Platt/Getty Images)

Li also noted that earnings estimates for companies remain too high given BlackRock’s vision of a modest recession next year.

“We see the US equity market in terms of earnings per share growth next year at -6%, and that is at odds with the current consensus and market prices, which is why we lean on the equity rebound that we have seen at various times even just this month,” Li added.

Truth be told, the market is likely to enter 2023 on weak footing.

Shares were squeezed again on Thursday after the weak quarter and chip giant Micron’s outlook triggered further economic concerns.

In December alone, the S&P 500, Dow Jones Industrial Average and Nasdaq Composite were down more than 5%, 3% and 7%, respectively.

The selling pressure in the markets returned after the Fed agreed to raise interest rates by 50 basis points at its final policy meeting earlier this month, taking the key rate to its highest level since 2007. The bank Central also surprised market watchers in two other ways.

First, the Fed’s updated economic forecast showed officials see rates peaking at 5.1% in 2023. That’s another 50 basis points higher than expected in September.

Second, Fed Chairman Jerome Powell seemed more aggressive on central bank policy than some expected.

Even this month’s weak readings on retail sales and consumer confidence didn’t help market sentiment.

Li and his team think this could be a good time for investors to start moving into bonds.

“The difference from the beginning of this year if we look at the beginning of next year is that income has finally returned to fixed income,” Li said. “You get paid quite handsomely on the short end of the government bond market. You get paid more than 4% without running any term or credit risk. And for high-quality credit, you get paid more than 6% without running much term risk or also, quite frankly, a lot of credit risk, which we think is very, very attractive.”

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and go LinkedIn.

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