BlackRock: Recession Coming, Not Priced Into Stocks Yet

What You Need to Know

Inflation will stay above 2%, BlackRock predicts.
The firm is underweight developed market stocks for now.
BlackRock’s high-grade credit picks include short-term government bonds.

Stock prices don’t yet reflect the coming economic downturn as central banks purposely seek to cause recessions to tame inflation, BlackRock Investment Institute said in its recent 2023 global outlook.

“A recession is foretold,” the firm said, noting it is underweight developed market equities for now as central banks move to overtighten monetary policy. Corporate earnings expectations haven’t priced in even a mild recession, BlackRock added.

The four-decade “great moderation” marked by mostly stable activity and inflation is done, replaced by a new regime with more market and macroeconomic volatility, BlackRock analysts wrote.

“We expect to turn more positive on risk assets at some point in 2023 — but we are not there yet,” they wrote. “And when we get there, we don’t see the sustained bull markets of the past. That’s why a new investment playbook is needed.”

That playbook involves more frequent portfolio changes by balancing views on risk appetite with estimates of how markets are pricing in economic damage, and for taking more granular views on sectors, regions and sub-asset classes rather than on broad exposures, the firm said.

Contrary to what investors long expected, central bankers won’t ride to the rescue when growth slows, according to BlackRock.