Last week was a bad week for Wall Street. After trading sideways at the start of the week, all major stock averages headed south towards the end. However, investors had nowhere to hide as the selloff finally spilled over into oil and other commodities on Friday.
What haunts Wall Street? Several things.
One of them is profit jitters. They started with Netflix earlier this week and expanded into healthcare stocks on Friday. “Currently, the percentage of S&P 500 companies beating EPS estimates is above the five-year average, but the magnitude of these positive surprises is below the five-year average,” John said. Butters, vice president and chief earnings analyst. to FactSet. “As a result, the index is reporting higher first quarter earnings today compared to the end of last week and relative to the end of the quarter. However, the index is also reporting earnings growth at a figure for the first time since Q4 2020. The lower earnings growth rate in Q1 2022 compared to recent quarters can be attributed to both a difficult comparison with unusually high earnings growth in Q1 2021 and persistent macroeconomic headwinds.
Simply put, things on the earnings front are good but not good enough to beat the “whisper numbers” and justify market valuations, especially among high-flying stocks in a bull market. Those who have been around Wall Street have seen this spectacle many times before.
Meanwhile, according to some market analysts, the market does not appear to be oversold, including big tech, which is now part of major stock indexes. “Big tech stocks are definitely not oversold. In fact, I would say that due to high PEs and low earnings over the past two quarters, these stocks are stuck in a rut, and far too many people still own them think that’s easy money,” said Bob Bilbruck, CEO of Capture. “Add to that supply chain issues, sky-high inflation and the coming recession (I would say, and the charts show we’re already in one) that people in these big tech stocks are going to get their faces ripped off and likely to see a 40% decline in the stock price over the next two quarters. My target for the DOW is 26K by the end of Q3 22.”
Then there is the continued nervousness of rising interest rates. Thanks to a 40-year high for inflation, which helped push the benchmark 10-year US Treasury close to the physiological level of 3%, more than double what it was three months ago .
Meanwhile, Fed officials are making hawkish comments, which are throwing cold water on market rallies like Fed Chairman Jerome Powell’s hawkish comments on Thursday. He suggested the Fed could raise the target federal funds rate by 50 basis points at its next meeting in May, reversing its previous dovish stance.
“What can we expect when Jerome Powell, who for months argued that inflationary pressure is transitory, now uses terms like ‘absolutely essential’ when he pledges to raise rates faster than foreseen ? In the long term, the policy direction of the Fed is most likely the main force shaping market sentiment,” says Kunal Sawhney, CEO of Kalkine Group. “The geopolitical conflict, with Goldman Sachs having recently highlighted Russia’s debt problems, would also influence the Fed’s position if need be. In the event that the conflict negatively impacts the economic recovery of the United In addition to hitting corporate earnings, the Fed could reverse course and become a bit more dovish than aggressive in rate hikes.”
Speaking of geopolitical conflicts, Wall Street is also worried about the diminishing influence of international institutions and the de-globalization of the economy, making the global economy look more and more like 1914 rather than 1948.
Yet Wall Street has demonstrated a remarkable ability to shrug off bad news and come back, although things may get worse before they get better. It all depends on the two key variables that determine valuations, earnings and interest rates.
Next week, investors will have a chance to determine the direction of earnings as tech giants like Apple, Amazon and Microsoft report earnings. Plus, investors will get a chance to see where inflation, the critical factor determining interest rates, is heading as the US government releases new consumer price data.
Any positive surprises on either front could signal that the worst is over, at least in the short term.
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