Stocks slumped, with traders positioning for a hot inflation reading and the start of a key earnings season that may provide clues on whether the economy is headed toward a recession. The dollar climbed.
A rout in megacaps like Tesla and Apple weighed heavily on trading.
Twitter sank as Elon Musk walked away from his $44 billion deal to buy the company, setting the scene for a legal battle.
The euro edged closer toward parity with the greenback, while 10-year U.S. yields dropped below 3%.
Amid a pervasive confluence of economic challenges, investors are waiting to see if profits are holding up or if companies will cut forecasts significantly.
One reason for caution is the dichotomy between two major Wall Street forces.
Analysts are betting Corporate America is resilient enough to pass on higher costs to consumers at a time when many strategists aren’t really convinced that’s the case.
“The stock market has NOT already priced in any possible upcoming decline in earnings estimates from this year (or next),” wrote Matt Maley, chief market strategist at Miller Tabak. “Even if earnings estimates stay stable and especially if they decline, the stock market is going to have to fall further before we see an important bottom.”
Maley noted that stocks are trading at valuation levels that are seen as highs – not lows.
The current price-to-sales metric, for instance, is at the same level of market tops in 2020, 2018 and at the tech bubble in 2000, he added.
Price pressures, a wave of monetary tightening and a slowing economy continue to keep investors on the sidelines even after an $18 trillion first-half wipeout in global equities.
A U.S. inflation reading on Wednesday is expected to get closer to 9%, buttressing the Federal Reserve’s case for a jumbo rate boost in July.
Steep Fed hikes and recession fears have lifted the greenback to the highest levels since March 2020.
The dollar surge will be a “massive headwind” for profits at many large U.S. firms and another reason to expect a dimming earnings outlook, wrote Michael Wilson, chief U.S. equity strategist at Morgan Stanley.
Billionaire investor Leon Cooperman said that a stronger dollar is indeed “negative for corporate profits.”
In fact, several firms, like giants Microsoft, Costco and Salesforce, have also bemoaned the impacts of the U.S. currency’s meteoric ascent.
For Wilson, the S&P 500’s bear market will continue, and he sees fair value at 3,400-3,500 in case of a soft landing and 3,000 in a recession – a 23% downside from Friday’s close.“A stagflationary stall is as probable as an outright recession,” wrote Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management.
Meantime, Citigroup Inc. strategists pointed out that there’s a strong correlation between the Fed’s rate trajectory and earnings growth.
They say it’s been common for profits to rise as the Fed tightens its policy, and to contract when the central bank switches to easing in response to economic weakness.
That means corporate earnings should remain resilient to surging inflation and slowing growth, paving the way for battered U.S. stocks to rally in the remainder of 2022, they added.
As big banks kick off the earnings season this week, traders will be looking for clues about the health of the consumer and spending trends as well as lending to businesses and corporate confidence.
Real-estate valuations and lending may also be key for market direction, along with thoughts on the state of capital markets.
Results from the FAANG cohort of megacaps like Facebook owner Meta Platforms Inc. and Google’s parent Alphabet Inc. won’t come out until later this month.
But traders are getting ready for heightened volatility as profit cuts by industry analysts have been lagging, leaving room for big surprises and dramatic post-earnings moves.
Elsewhere, Bitcoin fell again – and Wall Street expects the cryptocurrency’s selloff to get a whole lot worse.
The token is more likely to tumble to $10,000, cutting its value roughly in half, than it is to rally back to $30,000, according to 60% of the 950 investors who responded to the latest MLIV Pulse survey. The tally also showed that 40% saw it going the other way.
Crude declined amid a renewed increase in China’s virus cases, while a court order allowed the crucial CPC terminal on Russia’s Black Sea coast to stay operational – easing some supply concerns.
Chicago corn futures climbed as U.S. forecasts point to a heat wave during the crop’s key development period.
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