European equities are at a seven-week high at the height of earnings season, but the outlook is darkening given a prolonged war in Ukraine that has squeezed European gas supplies from Russia. Some economists believe the region could tip into a recession by early next year.
"We believe the market consensus for European earnings is too constructive and still too optimistic, and not yet reflecting the fact that we believe the euro area is actually going to see a recession this year," said BlackRock Investment Institute's Wei Li.
She said that the protracted nature of the war in Ukraine had stoked a 1970s style energy crisis and was one reason why the euro zone was likely to slip into recession.
BlackRock Investment Institute is underweight developed market equities.
Commenting on Wednesday's 75 bps interest rate hike from the U.S. Federal Reserve, Li said Fed chief Jerome Powell's comments suggested the Fed was not yet at a dovish pivot.
"The Fed is not yet backing away from its hiking intention, and yesterday was not the dovish pivot we would need to see before leaning into a bear market rebound."
(Reporting by Lucy Raitano and Dhara Ranasinghe; Editing by Saikat Chatterjee)
