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Equity markets rebound when investors react to rising inflation

On Friday, the yield on the two-year government bond jumped to 3.06 per cent, up about a quarter of a point, while the yield on 10-year bonds rose to 3.16 per cent, up about a tenth.

Ultimately, for investors, the concern is how high prices and rising borrowing costs will affect consumer spending and corporate profits. Absorbing the costs will hurt the company’s profits, but transferring them could exacerbate the problems in the economy, said Yung-Yu Ma, investment strategist for BMO Wealth Management in the United States.

“This is a very difficult moment,” said Mr. Ma. Most companies are unlikely to maintain their profit margins in the face of rising energy costs, he said.
Stock market analysts have made what Mr. Ma called “wildly optimistic”[ads1]; earnings estimates, which he said are likely to be revised in the coming months and eventually reflected in lower stock prices.

This week, Target’s shares fell after cutting its earnings forecast for the second time in three weeks, as inflation and changes in customer habits ate into margins, leaving it with too much unsold inventory, which it said they would try to sell at a discount.

The S&P 500 is now down 18.7 percent from the record on January 3, bringing it back within range of the bear market – a fall of 20 percent from the highest – signaling a serious shift in investor sentiment on Wall Street. The index plunged briefly into the bear’s territory last month, before recovering to close just above the psychologically significant level.

Phil Orlando, chief strategist at Federated Hermes, an asset management firm, said in an interview that he expected the market to fall further, perhaps 10 percent lower than current levels over the summer. He favors so-called value stocks, such as those in the energy, finance and health sectors, over growth stocks, such as technology companies, because they have cheaper valuations and are more promising in this environment.

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