Despite a flurry of corporate headlines, the S&P 500 rose 0.66% this week, which pushed its year-to-date gain to 13.6%. But the market remains down 19.9% from its all-time high in November 2021. And Wall Street is getting worried about earnings.
The Federal Reserve has continued to raise interest rates, and many investors are questioning whether this will lead to a recession. This has spooked some investors, and led to a sell-off on the stock market. The market is also looking ahead to a key inflation report on Wednesday. The report showed annual inflation slowed, which could be a sign that the Fed will need to slow its rate hikes to control prices.
The housing market was softer than expected in July, and many of the biggest winners on Wall Street have ties to the housing market. Homebuilders soared, while home products manufacturers and home furnishings makers jumped. But a weaker economy and a fading housing market are leading to a challenging environment for stocks. And with a looming recession on the horizon, the S&P 500 is at risk of falling more than 20%. But a pause in rate hikes, or even a reduction in inflation, could help the economy and the market bounce back.
During this month, the S&P 500 has posted 32 new 52-week highs, and the Nasdaq Composite has recorded 82 new highs. However, the S&P 500 has not closed above its 200-day moving average since early April. This means that the market could fall to a new low by the end of this year. In fact, the market’s rout this year has been almost entirely fueled by a rash of “safe” asset yields rising.
The Federal Reserve has been raising rates, and is expected to increase them by a quarter-point in September. In the meantime, the economy is still growing, but it is likely to slow down sooner than expected. This is creating anxiety for investors, and contributing to an extremely risk-averse investor psychology.
Some investors are waiting to see whether banks will be able to build up their loan loss reserves to offset the effects of any recession. While the Federal Reserve is expected to pause any rate hikes after September, it is not clear how long that pause will be. The Fed will then take a pause to assess the damage, and might need to continue raising rates to control inflation.
The ARK Innovation ETF, a proxy for tech-heavy companies that are risky, has fallen 59% this year, and is now 70% off its all-time highs set in February 2021. That means investors may be pricing in an earnings downturn for 2023. And Morgan Stanley’s Katy Huberty says that the dividend futures market is also pricing in a downturn for 2023.
Meanwhile, the Federal Reserve’s move has spooked investors, and led to a sell-off in the stock market. The Dow Jones Industrial Average fell 260 points, while the Nasdaq Composite lost 2.1%. Earlier, the 10-year U.S. Treasury yield rose four basis points to 3.927%. This has weighed on high-growth companies, such as Amazon and Apple, and on technology shares.
