Stocks posted broad-based losses Monday, with traders bracing for a key inflation reading and the start of the earnings season for clues on whether the economy is headed for a recession. The dollar rallied.
All major groups in the S&P 500 retreated, with big tech weighing heavily on the equity market.
Twitter plunged after Elon Musk walked away from his $44 billion deal to buy the company, setting the scene for a disruptive legal battle.
The euro edged closer toward parity with the greenback, which climbed as much as 1.1%. Treasury 10-year 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.
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 for this bear market.”
In fact, Maley noted that stocks are trading at valuation levels that are seen as highs – not lows.
The current price-to-sales metric 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 global economy continue to keep investors on the sidelines even after an $18 trillion first-half wipeout in global equities.
A U.S. inflation reading later this week is expected to get closer to 9%, buttressing the Federal Reserve’s case for a jumbo July rate increase.
A combination of steep Fed hikes and economic growth 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.
Wilson says the S&P 500 bear market will continue, and 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.
“Markets are moving at lightening speed to discount a rollover in inflation rates, a reversal of Fed tightening and an outright recession,” wrote Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management. “A stagflationary stall is as probable as an outright recession.”
