Wall Street Sours on S&P as Margin Woes Rattle Corporate America

Wall Street is afraid to buy the dip this time around.

Even amid this latest leg of the stock market selloff, equities still aren’t fully reflecting the risks facing corporate earnings, according to strategists at Morgan Stanley, Goldman Sachs Group Inc. and BlackRock Investment Institute. Weaker consumer demand and aggressive tightening by the Federal Reserve in an attempt to fight the hottest US inflation in four decades can do further damage to corporate bottom lines and, in turn, share prices.

“We’re not buying the stock dip because valuations haven’t really improved, there’s a risk of Fed overtightening, and profit margin pressures are mounting,” BlackRock strategists, led by Wei Li, wrote in a note to clients Monday.

Read: S&P 500 Margins Are Tanking and That Spells Trouble for Stocks

That view echoes what’s being said by Morgan Stanley and Goldman Sachs, who both believe stocks aren’t fully reflecting the challenges facing the economy. BlackRock, which is overweight equities in the long run, is neutral on stocks over the next six to 12 months. While profit margins have climbed for the past two decades, BlackRock now see increasing risks as businesses struggle to pass on higher costs to consumers.

“We expect the energy crunch to hit growth and higher labor costs to eat into profits,” Li and her team added.

Depressed consumer sentiment is a key risk to the US stock market and the economy as the Fed is set to keep fighting surging inflation with rate hikes, Morgan Stanley strategists led by Michael Wilson wrote in a note. Meanwhile, Goldman Sachs Group Inc. strategists led by David J. Kostin said that US earnings estimates are still too high and expect them to be revised downwards even further.