Wall St Week Ahead Investors wonder when the fierce sell-off in US equities will end.

Wall St Week Ahead Investors wonder when the fierce sell-off in US equities will end.
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A specialist trader works on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., September 22, 2022. REUTERS/Brendan McDermid

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NEW YORK, Sept 23 (Reuters) – A week of heavy selling rocked U.S. stocks and bonds, with many investors bracing for more pain ahead.

Wall Street banks are adjusting their forecasts to account for a Federal Reserve that shows no evidence to ease, signaling more tightening to fight inflation after yet another rate hike hit the market this week.

The S&P 500 is down more than 22% this year. On Friday, it briefly fell below its mid-June closing low of 3666, erasing a strong summer rally in US stocks before paring losses and closing above that level.

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

If the S&P 500 closes below its mid-June low in the coming days, that could spark another wave of aggressive selling, Stovall said. This could send the index as low as 3200, a level in line with the average historical decline in bear markets that coincide with recessions.

While recent data has shown a comparatively strong US economy, investors are concerned about the Federal Reserve tightening. will bring a recession. read more

Market timeline

A loss in the bond markets added pressure on stocks. Benchmark 10-year Treasury yields, which move inversely to prices, recently hovered around 3.69%, their highest level since 2010.

Higher government bond yields can make stocks less attractive. Technology stocks are particularly sensitive to rising yields because their value depends heavily on future earnings, which are further discounted when 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 sell-off in both stocks and bonds.

“We say new highs in yields equal new lows in stocks,” he said, estimating the S&P 500 will fall to 3,020, at which point investors should “gorge” on stocks.

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

“Based on discussions from our clients, most 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 indicates a bottom is coming.

The Cboe volatility index, known as Wall Street’s fear gauge, soared above 30 on Friday, its highest point since late June, but below the average level of 37 that has marked selling crescendos in previous market crashes since 1990.

Registered Bond Funds Departures of $6.9 billion for the week to Wednesday, while $7.8 billion was withdrawn from equity funds and investors poured $30.3 billion in cash, BofA said in a research note citing data from EPFR. Investor sentiment is the worst since the 2008 global financial crisis, the bank said.

Kevin Gordon, senior manager of investment research at Charles Schwab, believes more trouble lies ahead because central banks are tightening monetary policy in a global economy that already appears to be weakening.

“It will take us longer to get out of this impasse not only because of the slowdown around the world, but because the Fed and other central banks are getting into the slowdown,” Gordon said. “It’s a toxic mix for risk assets.”

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

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

A key sign to watch in the coming weeks will be how steeply 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 market downturn has not yet been priced in, he said.

A recession would likely push 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 like the favourite,” he said. “It’s very hard to be bullish on equities until the Fed designs a soft landing.”

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

Our standards: The Thomson Reuters Trust Principles.

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