BlackRock says markets are expecting too many interest rate hikes, stays bullish on stocks

• BlackRock has said central banks are likely to raise interest rates less sharply than investors expect.
• Traders are expecting five rate hikes from the Fed this year as it grapples with soaring inflation.

Investors are expecting too many interest rate hikes from global central banks, BlackRock has said, with the real outcome likely to be more "dovish" than many anticipate.

"We believe central banks are talking tough but ultimately will acknowledge that fighting inflation by aggressively hiking will come at too high a cost to growth," analysts at the $10 trillion asset manager's investment institute said in a note Monday.

"This is why we see the eventual policy response as muted," the analysts, led by Jean Boivin, said.

BlackRock said it thinks stocks will continue to fare well, especially as the interest rate outlook is more "benign" than many investors anticipate.

Investors now think the US Federal Reserve will hike interest rates five times this year, with many expecting further increases in 2023 and 2024 to take the target rate to around 2.5% from its current level next to zero.

Traders dialed up their expectations after strong jobs data, released Friday, suggested the Fed may be facing stronger growth and inflation than previously thought.

Central banks around the world are turning off the stimulus taps as they grapple with the strongest inflation in decades. It's caused volatility in stocks, with the S&P 500 down around 5% for the year.

The Bank of England last week raised interest rates for the second meeting running. The European Central Bank has been more "dovish" – that is, keen to keep monetary policy loose – but last week refused to rule out a rate hike in 2022.

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Central banks may say they're getting tough on inflation, but really they're just planning to return interest rates to levels that would still be low by historical standards, BlackRock's analysts said.

The tough talk is causing markets to get ahead of themselves and to expect more interest rate hikes than are likely to materialize, they said. The outlook is still relatively good for stocks, although it could continue to be rocky, BlackRock said.

"We keep our modest overweight on equities because of the still-low sum total of expected policy rate hikes, but are bracing for bouts of volatility along the way," the analysts wrote.

"We see this creating opportunities for those with long investment horizons after a tough start for risk assets this year."