Wall St Week Ahead Investors are wondering when the vicious sell-off in US stocks will end

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

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

Wall Street banks are adjusting their forecasts to take into account a Federal Reserve that shows no evidence of letting up, signaling more tightening ahead to fight inflation after another rate hike in the market this week.

The S&P 500 is down more than 22% this year. On Friday, it fell briefly below the closing low of 3,666 in mid-June, erasing a strong summer rally in US stocks before paring losses and closing above that level.

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

If the S&P 500 closes below its mid-June low in the coming days, that could lead to another wave of aggressive selling, Stovall said. This could send the index as low as 3,200, a level in line with the average historical decline in bear markets that coincide with recessions.

While recent data has shown a relatively strong US economy, investors are concerned that the Fed’s tightening will lead to a slowdown. read more

A rout in the bond markets increased pressure on the shares. Yields on the benchmark 10-year Treasury note, which moves inversely to prices, recently stood at around 3.69%, the highest level since 2010.

Higher interest rates on government bonds may dull the appeal of equities. Technology stocks are particularly sensitive to rising interest rates because their value rests largely on future earnings, which are discounted more deeply when bond yields rise.

Michael Hartnett, chief investment strategist at BofA Global Research, believes high inflation is likely to push U.S. Treasury yields as high as 5% over the next five months, exacerbating the selloff in both stocks and bonds.

“We say that new highs in returns correspond to new lows in stocks,” he said, estimating that the S&P 500 will fall as low as 3,020, at which point investors should “turn off” stocks.

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

“Based on our client discussions, a majority of equity investors have adopted the view that a hard landing scenario is inevitable,” Goldman analyst David Kostin wrote. read more

Investors are looking for signs of a capitulation point that suggests a bottom is near.

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

Bond funds recorded outflows of $6.9 billion in the week to Wednesday, while $7.8 billion was removed from mutual funds and investors plowed in $30.3 billion in cash, BofA said in a research note citing EPFR data. Investor sentiment is the worst it has been since the global financial crash of 2008, the bank said.

Kevin Gordon, senior director of investment research at Charles Schwab, believes there is more downside ahead as central banks tighten monetary policy in a global economy that already appears to be weakening.

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

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

“The selling will be arbitrary,” wrote Keith Lerner, co-chief investment officer at Truist Advisory Services. “The increased likelihood of breaking the June S&P 500 price low could be what it takes to invoke even deeper fear. Fear often leads to short-term bottoms.”

A key signal to watch in the coming weeks will be how sharply corporate earnings estimates fall, said Jake Jolly, senior investment strategist at BNY Mellon. The S&P 500 currently trades at about 17 times expected earnings, well above its historical average, suggesting a recession has yet to be priced into the market, 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 retreating is if the economy is able to avoid a recession, and right now that doesn’t seem to be the favorite,” he said. “It’s very hard to be bullish on stocks until the Fed develops a soft landing.”

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

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