Goldman Sachs Group Inc. and BlackRock Inc. are turning more bearish on equities for the short term, warning that markets are yet to price in the risk of a global recession.
Flagging rising real yields as a major headwind, Goldman strategists cut equities to underweight in the U.S. investment bank's global allocation over the next three months while staying overweight cash.
BlackRock is advising investors to "shun most stocks," adding that it is tactically underweight developed-market shares and prefers credit in the short term.
"Current levels of equity valuations may not fully reflect related risks and might have to decline further to reach a market trough," Goldman strategists including Christian Mueller-Glissmann wrote in a note Monday. Goldman's market-implied recession probability has risen to above 40% following the recent bond sell-off, "which historically has indicated elevated equity drawdown risk," they wrote.
Similar concerns are being echoed by Morgan Stanley and JPMorgan Asset Management after central bankers from the US to Europe touted their resolve to fight inflation, sending global stocks into a free fall over the past few days.
Little respite seems to be in sight even as the MSCI World Index's members have lost more than $8 trillion in value since a mid-September peak amid a surge in US yields and the dollar.
"We don't see a 'soft landing'" where inflation returns to target quickly without crushing activity, BlackRock Investment Institute strategists including Jean Boivin and Wei Li wrote in a note Monday. "That means more volatility and pressure on risk assets."
TINA to TARA
As stock market volatility continues to rise, JPMorgan Asset is also sticking to its underweight on equities heading into the fourth quarter. The firm 'strongly' favors investment-grade credit over high yield, Sylvia Sheng, global multi-asset strategist, wrote Tuesday, anticipating sluggish growth in the U.S. and recession in Europe over the next 12 months.
