As a week-long selloff that pushed major indices into bearish territory intensifies, investment banks are warning clients that the worst may yet be ahead, with some pundits warning the S&P 500 could plunge up to 11% further if corporate earnings continue to disappoint as the Federal Reserve begins to raise interest rates.
Led by a fifth straight day of heavy losses in the technology sector, the S&P 500 fell nearly 4% to 4,236 on Monday morning, sending the index down more than 10% for the year.
A “disappointing” start to the fourth-quarter earnings season could spell trouble for stocks this year, Goldman Sachs’ David Kostin wrote in a Monday note, forecasting the S&P could plunge as much as 11% from Friday’s close (at 3,914) if higher interest rates and reduced Fed stimulus push annual corporate profits down 4% from 2021.
Morgan Stanley’s Michael Wilson struck a similar tone, telling clients on Monday to “hunker down for a few more months” as slowing earnings growth joins monetary policy uncertainty as the main concerns of the market. Marlet.
“It’s too early to be optimistic,” Wilson said, warning that the S&P could plunge another 10% while pointing out that the “more speculative parts” of the market have been hit the hardest, with names like Peloton in down 75% in six months.
As inflation drops once the Fed starts raising rates, Wilson says he’s ‘most bearish’ on consumer goods, apparel and housing-related stocks that have benefited from higher prices .
Kostin says some sort of catalyst, like a slowdown in inflation, will be needed to rein in the selloff, but Goldman economists don’t expect prices to fall until the second quarter; other potential catalysts include an “extremely strong” earnings season or a Fed policy pivot.
“Winter is here, and the damage below the surface has been enormous and even catastrophic for many individual stocks,” Wilson said. “The Fed is serious about fighting inflation, and is unlikely to turn dovish anytime soon given the severity of these economic threats and the political support to act.”
Not everyone is short-term bearish in the market. In emailed comments on Monday, Frank Panayotou, managing director of UBS Private Wealth Management, said the drop in stock prices this year “seems overdone and represents a buying opportunity for long-term investors.” He points out that equities have historically performed well in the months leading up to the Fed’s first rate hike, but he warns that markets will be more volatile than usual. “Investors should be prepared for more volatility and lower returns overall than we’ve been accustomed to in recent years,” he said.
A series of events will surely test the market this week. On Wednesday, the Fed is expected to take stock of when it might raise interest rates. Additionally, big tech companies like Apple, Microsoft and Tesla begin reporting their fourth-quarter results on Tuesday.
The Fed triggered a broad selloff this month by warning that it will move faster than expected to reverse policy intended to support the economy during the pandemic to combat rising inflation. A worse-than-expected start to the earnings season has since intensified the disadvantage, with Netflix slumping 22% on Friday after reporting slowing subscription growth. Although Fed officials said last month they expect only three interest rate hikes this year, Goldman Sachs chief economist Jan Hatzius said Monday he expects what the central bank is actually raising interest rates four times this year (from March) given a “greater sense of urgency”. than he previously expected from the Fed this month.
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