BlackRock downgrades stocks, citing Fed over-tightening and China risk

With the Federal Reserve’s tightening cycle underway and a slowdown in China that rivals the 2020 downturn, BlackRock is shifting its perspective on the equities market. The asset manager on Monday downgraded developed market equities to a neutral rating from overweight as central banks look to combat rising inflation. BlackRock manages about $9.6 trillion in assets, according to the firm’s first-quarter earnings release . “The Federal Reserve signaled its focus is on taming inflation without flagging the big economic costs this will entail,” wrote Jean Boivin, head of BlackRock Investment Institute. “As long as this is the case and markets believe it, we don’t see the basis for a sustained rebound in risk assets.” Meanwhile, a downturn in China that’s “starting to rival” the 2020 slowdown is likely to create aftershocks in the global economy. “We think this will reduce growth in major economies and nudge up DM inflation at a very inopportune time when higher inflation is already proving more persistent,” Boivin wrote. The downgrade from BlackRock comes as the markets try to bounce back from an ongoing sell-off in which the Dow Jones Industrial Average capped its first eight-week losing streak since 1923 and the Nasdaq Composite dipped further into bear market territory. While BlackRock ultimately downgraded U.S. stocks, Boivin said a dovish shift from the Fed could convince the asset manager to get back into equities. In this environment, BlackRock also said it prefers carrying short-term government bonds and remains underweight on U.S. Treasurys. “Stocks plumbed new 2022 lows on fears steep rate rises will trigger a growth slowdown,” Boivin said. “We see a brighter picture, but this may not become clear for months.”