Wall St Week Ahead-Investors wonder when vicious sell-off in U.S. stocks will end

A week of heavy selling has rocked US stocks and bonds, and many investors are bracing for more pain.

Wall Street banks are adjusting their forecasts to reflect a Federal Reserve that shows no signs of slowing down, signaling further tightening to fight inflation after another market-wrecking rate hike this week.

The S&P 500 is down more than 22% this year. It briefly dipped below its mid-June closing low of 3,666 on Friday, erasing a strong summer rally in US stocks before paring losses to close above that level.

With the Fed poised to raise rates higher than expected, “the market is going through a crisis of confidence right now,” said Sam Stovall, chief investment strategist at CFRA Research.

If the S&P 500 closes below the mid-June low in the coming days, it could trigger another wave of aggressive selling, Stovall said. This could take the index as low as 3,200, a level in line with the average historical decline in bear markets that coincide with recessions.

While recent data shows a comparatively strong US economy, investors fear that Fed tightening will trigger a downturn.

A slump in the bond markets increased the pressure on stocks. Benchmark 10-year government bond yields, which move inversely with prices, recently stood at around 3.69%, the highest since 2010.

Higher government bond yields can dampen the attractiveness of equities. Tech stocks are particularly sensitive to rising yields because their value is heavily dependent on future earnings, which are more heavily discounted as bond yields rise.

Michael Hartnett, chief investment strategist at BofA Global Research, believes high inflation is likely to push US Treasury yields as high as 5% over the next five months, exacerbating the sell-off in both stocks and bonds.

“We say new highs in yields mean new lows in stocks,” he said, estimating that the S&P 500 will fall as low as 3,020 points, at which point investors should be “hogging” stocks.

Goldman Sachs, meanwhile, cut its year-end target for the S&P 500 by 16% from 4,300 points to 3,600 points.

“Based on our client conversations, a majority of equity investors believe a hard landing scenario is inevitable,” wrote Goldman analyst David Kostin.

Investors are looking for signs of a capitulation point that would indicate a bottom is near.

The Cboe volatility index, known as Wall Street’s fear gauge, shot above 30 on Friday, its highest since late June but below the 37 average that has fueled selling in past market declines since the 1990s.

Bond funds saw outflows of $6.9 billion in the week ended Wednesday, while $7.8 billion was removed from stock funds and investors put $30.3 billion in cash, BofA said in a research note citing on EPFR data. Investor sentiment is the worst since the 2008 global financial crash, the bank said.

Kevin Gordon, senior investment research manager at Charles Schwab, believes more downside is on the horizon as central banks tighten monetary policy in a global economy that already appears to be weakening.

“We’re going to take longer to get out of this rut, not only because of the slowdown around the world, but also because the Fed and other central banks are moving into the slowdown,” Gordon said. “It’s a toxic mix for risk assets.”

Still, some on Wall Street say the declines may be overdone.

“The sale will be indiscriminate,” wrote Keith Lerner, co-chief investment officer at Truist Advisory Services. “The increased likelihood of breaking the June low in S&P 500 price may be what it takes to invoke even deeper fear. Fear often leads to short term lows.”

A key signal to watch in the coming weeks will be how much corporate earnings estimates fall, said Jake Jolly, senior investment strategist at BNY Mellon. The S&P 500 is currently trading at about 17 times expected earnings, well above its historical average, suggesting a recession is not yet priced into the market, he said.

A recession would likely see the S&P 500 trade between 3,000 and 3,500 in 2023, Jolly said.

“The only way we’re going to see earnings not shrink is if the economy is able to avoid a recession, and right now the odds favorite doesn’t seem to be,” he said. “It’s very difficult to be bullish on stocks until the Fed plans a soft landing.” Wall St Week Ahead-Investors wonder when vicious sell-off in U.S. stocks will end

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