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S&P 500 suffers its longest slide since January amidst big tech sell-off
KV Prasad Jun 13, 2022, 06:35 AM IST (Published)
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Summary
Analysts at UBS believe that this is just a period of consolidation and stocks are expected to keep rising higher through the year.
The US stock market saw its longest losing streak since January as a handful of big techs sold off — despite a slide in bond yields.
Equities fell for a fourth straight day, with the S&P 500 extending a drop from its all-time high to more than 4%. Chipmakers bore the brunt of the selling after ASML Holding NV’s orders tumbled. Nvidia Corp. led losses in megacaps. A tug of war between bulls and bears unfolded amid the expiration of VIX options — with Wall Street’s favorite volatility gauge whipsawing.
After a 10% stock rally in the first quarter — the strongest start to a year since 2019 — investors have been increasingly skeptical about how much further the market could go over the near term, even accounting for the continued strength in the economy.
“The combination of geopolitical uncertainty, rising interest rates, Fed hawkishness, and inflation frustration have combined to put bears temporarily in charge,” said Mark Hackett at Nationwide.
The S&P 500 slid to around 5,020. The Nasdaq 100 dropped over 1%. Just a day after Jerome Powell threw cold water on rate-cut bets, dip buyers emerged in the Treasury market, with two-year yields dropping further below 5% and a $13 billion sale of 20-year bonds drawing solid demand.
The US economy has “expanded slightly” since late February and firms reported greater difficulty in passing on higher costs, the Federal Reserve said in its Beige Book survey of regional business contacts.
Powell signaled this week that policymakers will wait longer than previously anticipated to cut rates following a series of surprisingly high inflation readings. Fed officials narrowly penciled in three cuts in forecasts published last month — but investors are now betting on just one to two this year, futures markets show.
“Fed Chair Powell was downright hawkish,” said Win Thin and Elias Haddad at Brown Brothers Harriman. “The Fed wants the market to do the tightening for them. Financial conditions remain too loose — and so some combination of higher yields, wider spreads, stronger dollar, and lower equities is needed to tighten conditions.”
While global equities are facing tactical headwinds, this is just a consolidation phase and stocks are expected to keep rising this year, according to UBS strategists led by Andrew Garthwaite.
They noted positive developments including artificial intelligence pushing productivity and earnings higher, lower warranted equity risk premium, likely falling labor costs and less worries on margin pressures.
The equity risk premium for US equities — a measure of the differential between stocks and bonds’ expected returns — is now deep in negative territory, something that hasn’t happened since the early 2000s.
While this is not necessarily a negative indicator for the stock market, it all depends on the economic cycle. The lower ERP can be seen as a promise of a future boost in corporate profits, but also that a bubble is in the making.
Fundamentals and technical trends for equity markets still appear supportive, suggesting the recent pullback should prove temporary, according to HSBC strategists led by Max Kettner, who are using the decline to add to their bullish stance.
“Sentiment and positioning are not flashing a warning signal, though real money investors have started to extend their constructive stance on equities lately, they wrote.
US corporate earnings are set for a “healthier runway” through 2024 and investors are growing more confident that companies can meet expectations, according to Morgan Stanley strategists.
The market is watching for profits to bottom in the first quarter before sequentially recovering in the second quarter and eventually expanding in the back half of the year, a team including Michelle Weaver and Michael Wilson wrote.
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