Wall St Week Ahead Investors are wondering when the ferocious sell-off in US equities will end

A specialist trader works on the floor of the New York Stock Exchange (NYSE) in New York City, USA, September 22, 2022. REUTERS / Brendan McDermid

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NEW YORK, Sept. 23 (Reuters) – A week of heavy selling has rocked US equities and bonds, and many investors are bracing for further suffering.

Wall Street banks are adjusting their forecasts to take into account a Federal Reserve showing no signs of easing, signaling further tightening to fight inflation after another market rate hike this week.

The S&P 500 has dropped more than 22% this year. On Friday, it fell briefly below the mid-June closing low of 3.666, canceling a strong summer rebound in US equities before encountering losses and closing above that level.

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

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

Although recent data has shown a relatively strong US economy, investors fear the Fed tightening will cause a downturn. Read more

market history

A path in the bond markets has added pressure on equities. The benchmark 10-year Treasury yields, which move inversely to prices, recently stood at around 3.69%, the highest level since 2010.

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

Michael Hartnett, chief investment strategist at BofA Global Research, believes high inflation is likely to push US Treasury yields up to 5% over the next five months, exacerbating the selloff in equities and bonds.

“Let’s say new yield highs equate to new stock lows,” he said, estimating that the S&P 500 will drop to 3,020, at which point investors should “gorge” on equities.

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

“Based on discussions with our clients, the majority of equity investors have adopted the view that a hard landing scenario is inevitable,” wrote Goldman analyst David Kostin. Read more

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

The CBOE Volatility Index, known as a Wall Street fear indicator, surpassed 30 on Friday, its highest since late June, but below the average level of 37 which marked growing sales in past market declines. since 1990.

Bond funds recorded outflows of $ 6.9 billion during the week through Wednesday, while $ 7.8 billion was removed from equity funds and investors invested $ 30.3 billion in cash, BofA said in a statement. research citing EPFR data. Investor sentiment is the worst since the 2008 global financial crash, the bank said.

Kevin Gordon, Charles Schwab’s Senior Investment Research Manager, believes there are further drawbacks in view of the fact that central banks are tightening monetary policy in a global economy that already appears to be weakening.

“It will take longer to get out of this rut ​​not only because of the worldwide slowdown, but because the Fed and other central banks are entering the slowdown,” Gordon said. “It’s a toxic mix for risk assets.”

However, some on Wall Street say the declines may be exaggerated.

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

A key sign to watch for in the coming weeks will be the sharp decline in corporate earnings estimates, said Jake Jolly, senior investment strategist at BNY Mellon. The S&P 500 is currently trading at around 17 times its expected earnings, well above its historical average, which suggests a recession has not yet been priced into the market, he said.

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

“The only way we see earnings not contracting is if the economy is able to avoid a recession and right now that doesn’t seem to be the odds favorite,” he said. “It is very difficult to be optimistic about stocks until the Fed engineers make a soft landing.”

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Reporting by David Randall; Additional reporting by Saqib Iqbal Ahmed; Editing by Ira Iosebashvili, Nick Zieminski and David Gregorio

Our Standards: Thomson Reuters Trust Principles.

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