For stock traders grappling with a hawkish Federal Reserve and a looming recession, the next shoe to drop will be on corporate earnings, according to a BlackRock Inc. co-chief investment officer. 

“What we’re concerned about increasingly is earnings downgrades and we haven’t had that yet,” Nigel Bolton of BlackRock Fundamental Equities, which comprises active stock strategies, said in an interview. “The tone of management teams is already starting to change and we’re going to see pretty substantial reductions for 2023,” he said.

The forecast further dims the outlook for equities, which have been hammered this year on concerns about the Fed’s aggressive policy tightening as it attempts to tame scorching inflation. Markets will discover Wednesday how the central bank responds to August’s hotter-than-expected consumer price report and its view on the US economy.

Analyst forecasts for corporate earnings have proved resilient so far and profit margin estimates have only just started coming off historic highs. In Europe, upgrades are still outnumbering downgrades, according to a Citigroup Inc. index. But there are worrying signs, with FedEx Corp. seeing two years of stock gains wiped out last week after it warned of worsening conditions. 

While a stronger-than-feared second-quarter earnings season fueled a sharp summer rally in equities, both the S&P 500 and the Stoxx Europe 600 indexes have now given up most of those gains. Strategists, including those at Morgan Stanley, Goldman Sachs Group Inc. and Sanford C. Bernstein warn of risks to corporate profitability.

BlackRock Investment strategists including Wei Li said in a note on Monday that a scenario of higher rates and an “imminent recession” wasn’t fully reflected in equity markets.

Bolton said the latest rebound in stocks was “just a bear market rally” and that a slowdown in consumer demand and a “hawkish-for-longer” Fed will spark new lows. Still, he sees US earnings outperforming those in Europe because of the impact of the energy crisis there. 

Among sectors, Bolton said banks stand to benefit from higher interest rates, while energy stocks are likely to be boosted over the next 6-to-12 months as supply remains tight. The biggest impact from Europe’s energy crisis will likely show up at steel, cement and chemicals companies, he said.