BlackRock Cuts US Stock Exposure, Says Rate Hike Expectations Are 'Overdone'

BlackRock (NYSE:BLK) is shifting toward U.S. Treasuries and taking profits on American stocks, arguing that government bonds now offer attractive returns and investors expect too many Federal Reserve interest rate hikes.

But the call faced an early test Wednesday as hotter-than-expected inflation pushed Treasury yields higher and sharply increased expectations of another rate hike this month.

BlackRock Sees Opportunity in Treasury Selloff

After spending much of the past six years betting against Treasuries, BlackRock now sees a buying opportunity.

The firm’s investment institute upgraded short-term Treasuries to overweight, moved longer-term bonds to neutral and cut U.S. stocks to neutral.

The reversal comes after the 10-year Treasury yield soared from below 0.9% in October 2020 to around 5.25%.

BlackRock believes investors have gone too far in anticipating Fed rate hikes. Since January, expectations for interest rates over the following 12 months have shifted 1.6 percentage points higher.

“We think that is overdone,” the firm said in its latest commentary.

BlackRock estimates that interest payments could offset further losses in bond prices, even if yields rise another 0.75 percentage points over the next year.

It favors shorter-term bonds, which are less vulnerable to rising yields, while taking profits on U.S. stocks. The firm remains bullish on artificial intelligence.

Hot Inflation Sends Fed Hike Odds Surging

Wednesday’s inflation report gave investors reason to question BlackRock’s call.

Annual inflation rose to 3.7%, above expectations of 3.6%, while underlying inflation also exceeded forecasts. That strengthened the case for further Fed hikes, precisely what BlackRock believes markets have overestimated.

Treasury yields jumped in response, pushing bond prices lower. If inflation remains stubborn, the Fed may need to raise rates more aggressively than BlackRock anticipates, threatening the returns on the bonds it now favors.

On Polymarket, the probability of a quarter-point Fed hike on October 28 climbed to approximately 44%, from around 19% before the report.

Just two weeks earlier, October hike odds had fallen to 16% following a disappointing jobs report.

BlackRock shares rose around 3% in early morning trading Wednesday after the firm reported better-than-expected earnings.

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