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

On September 22, 2022, a specialist trader works on the floor of the New York Stock Exchange (NYSE) in New York City, USA. REUTERS/Brendan McDermid

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NEW YORK, September 23 (Reuters) – A week of heavy selling has rattled US stocks and bonds, with many investors poised for more pain.

Wall Street banks adjust their forecasts to account for a Federal Reserve. does not show evidence It signals further tightening to fight inflation after another rate hike that hurt the market this week.

The S&P 500 is down more than 22% this year. On Friday, it briefly dropped below the mid-June low of 3,666 and erased the sharp summer recovery in US stocks, cutting losses and closing above that level.

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“The market is currently going through a crisis of confidence,” said Sam Stovall, chief investment strategist at CFRA Research, with the Fed’s intention to raise rates higher than expected.

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

Investors fear Fed tightening as latest data shows US economy relatively strong will bring a fall. Read more

timeline of the market

The decline in bond markets put pressure on stocks. Ten-year Treasury benchmark yields, which move against prices, recently stood at around 3.69%, their highest level since 2010.

Higher yields on government bonds may blunt the attractiveness of stocks. Technology stocks are particularly susceptible to rising returns because their value is largely based on future earnings that are more deeply discounted when bond yields rise.

Michael Hartnett, chief investment strategist at BofA Global Research, believes high inflation will likely push US Treasury yields up to 5% over the next five months, driving sales in both stocks and bonds.

“We’re saying that new highs in yields equate to new dips in stocks,” he said, predicting the S&P 500 will drop as low as 3,020 at which point investors should “give up” on stocks.

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

“Based on our client conversations, most stock investors have taken the view that a hard landing scenario is inevitable,” said Goldman analyst David Kostin. Read more

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

Known as Wall Street’s fear indicator, the Cboe Volatility Index climbed above 30 on Friday, its highest point since late June, but below its average level of 37, which indicates increased selling in past market declines since 1990.

Bond funds recorded outputs In a research note citing EPFR data, BofA said during the week that it had withdrawn $6.9 billion through Wednesday, $7.8 billion from equity funds, and cashed $30.3 billion from investors. The bank said investor sentiment was at its worst since the 2008 global financial crash.

Kevin Gordon, senior investment research manager at Charles Schwab, believes there is more downside ahead as central banks tighten monetary policy to an already weakened global economy.

“It will take us longer to get out of this routine, not just because of the slowdown in the world, but because the Fed and other central banks are entering the slowdown,” Gordon said. “A toxic mixture for risk assets.”

Still, some on Wall Street say the declines may have been excessive.

“Sales are indiscriminate,” wrote Keith Lerner, co-investing officer at Truist Advisory Services. “The increased likelihood of a June S&P 500 break low may be just what it takes to arouse even deeper fear. Fear often leads to short-term bottoms.”

Jake Jolly, senior investment strategist at BNY Mellon, said an important signal to watch in the coming weeks will be how quickly corporate earnings forecasts will decline. The S&P 500 is currently trading at roughly 17x expected returns, well above the historical average, suggesting that the recession has yet to be priced in.

Jolly said a recession would push the S&P 500 to trade between 3,000 and 3,500 in 2023.

“The only way we’re going to see earnings shrink is if the economy can avoid a recession, and right now that doesn’t seem to be the odds favorite,” he said. “Until the Fed engineers make a soft landing, it’s hard to be optimistic about stocks.”