Stocks tumbled as traders positioned themselves for a high inflation reading and the start of a key earnings season that could provide clues as to whether the economy is heading into a recession. The dollar soared.
A sale of megacaps like Tesla Inc. and Apple Inc. weighed heavily on the stock market – which saw its lowest trading volume in 2022. Twitter Inc. plunged 11% as Elon Musk walked away from his deal $44 billion to buy the company, setting the stage for a legal battle. The euro edged closer to parity with the greenback, while US 10-year yields fell below 3%.
Amid an ubiquitous confluence of economic challenges, investors are waiting to see if earnings hold or if companies cut their forecasts significantly. One of the reasons for the caution is the dichotomy between two major forces on Wall Street. Analysts are betting that Corporate America is resilient enough to pass on rising costs to consumers at a time when many strategists aren’t really convinced that’s the case.
“The stock market has NOT already priced in a possible upcoming drop in earnings estimates this (or next) year,” wrote Matt Maley, chief market strategist at Miller Tabak. “Even if earnings estimates remain stable and especially if they fall, the stock market will still have to fall before seeing a significant bottom.”
Maley noted that stocks are trading at valuation levels considered highs – not lows. The current price-to-sales measure, for example, is on par with market highs in 2020, 2018 and the tech bubble in 2000, he added.
Price pressures, a wave of monetary tightening and a slowing economy continue to keep investors on the sidelines, even after an $18 trillion wipeout in global equities in the first half. A reading of US inflation on Wednesday is expected to come closer to 9%, bolstering the Federal Reserve’s case for a massive rate hike in July.
Sharp Fed hikes and recession fears have lifted the greenback to its highest level since March 2020. The soaring dollar will be a ‘massive headwind’ for earnings at many large US corporations and another reason for s Expect a lower earnings outlook, wrote Michael Wilson, chief US equity strategist at Morgan Stanley.
Billionaire investor Leon Cooperman said a stronger dollar is indeed “negative for corporate profits”. In fact, several companies like giants Microsoft Corp., Costco Wholesale Corp. and Salesforce Inc. also lamented the impacts of the US currency’s meteoric rise.
For Wilson, the S&P 500 bear market will continue, and he sees fair value at 3,400-3,500 in a soft landing and 3,000 in a recession – a 22% decline from the close. of Monday.
“A stagflationary stall is as likely as an outright recession,” wrote Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management.
Meanwhile, Citigroup Inc. strategists have pointed out that there is a strong correlation between the path of Fed rates and earnings growth. They said it was common for profits to rise when the Fed tightens policy and contract when the central bank shifts to easing in response to economic weakness.
That means corporate earnings should remain resilient to soaring inflation and slowing growth, paving the way for a recovery in struggling U.S. stocks by the rest of 2022, they added.
As the big banks kick off earnings season this week, traders will be looking for clues in consumer health and spending trends, as well as corporate lending and business confidence. Real estate appraisals and loans can also be essential for market direction, as well as thoughts on the state of capital markets.
Results from the FAANG cohort of megacaps like Facebook owner Meta Platforms Inc. and Google parent company Alphabet Inc. won’t be released until later this month. But investors are bracing for heightened volatility as earnings cuts by industry analysts have lagged, giving way to big surprises and dramatic post-earnings moves.
Elsewhere, Bitcoin has fallen again – and Wall Street expects the cryptocurrency’s selloff to worsen. According to 60% of the 950 investors who responded to the latest MLIV Pulse survey, the token is more likely to drop to $10,000, reducing its value by about half, than to rally to $30,000. The tally also showed that 40% saw it going the other way.
Crude fell amid a further rise in virus cases in China, while a court order allowed the crucial CPC terminal on Russia’s Black Sea coast to remain operational, easing some supply issues. supply. Chicago corn futures’ prices climbed as US forecasts point to a heat wave during the key crop development period.
What to watch this week:
- Profits owed by JPMorgan, Morgan Stanley, Citigroup, Wells Fargo
- BOE Governor Andrew Bailey discusses the economic landscape on Tuesday
- Amazon.com Inc. kicks off its Prime Day event on Tuesday
- South Korea and New Zealand rate decisions Wednesday
- US CPI data, Wednesday
- Federal Reserve Beige Book, Wednesday
- US PPI, jobless claims, Thursday
- China’s GDP, Friday
- U.S. Business Stocks, Industrial Production, University of Michigan Consumer Sentiment, Empire Manufacturing, Retail Sales, Friday
- G-20 finance ministers and central bankers meet in Bali, starting Friday
- Atlanta Fed President Raphael Bostic speaks on Friday
Some of the major movements in the markets:
- The S&P 500 fell 1.2% at 4 p.m. PT
- The Nasdaq 100 fell 2.2%
- The Dow Jones Industrial Average fell 0.5%
- The MSCI World index fell 1.3%
- The Bloomberg Dollar Spot Index rose 1%
- The euro fell 1.4% to settle at US$1.0044
- The British pound fell 1.1% to settle at US$1.1895
- The Japanese yen fell 1% to 137.41 per dollar
- The yield on 10-year Treasury bills fell nine basis points to 2.99%
- Germany’s 10-year yield fell 10 basis points to 1.25%
- The UK 10-year yield fell six basis points to 2.18%
- West Texas Intermediate crude fell 1.3% to US$103.44 a barrel
- Gold futures fell 0.6% to US$1,731 an ounce