Wall St Week Ahead Investors are wondering when the brutal selloff in US stocks will end

An expert trader works on the floor of the New York Stock Exchange (NYSE), New York, 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 adjust their forecasts to account for the Federal Reserve shows on the evidence The market is signaling further tightening to tackle inflation after a humiliating rate hike this week.

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

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

If the S&P 500 closes below mid-June levels in the coming days, it could trigger another wave of aggressive selling, Stovall said. This could push the index down to 3,200, a level consistent with historical average declines that have coincided with declines in bear markets.

Although the latest data shows that the US economy is relatively strong, investors are concerned about Fed tightening will lead to recession. read more

A rout in bond markets added pressure on stocks. The yield on the benchmark 10-year Treasury, which moves inversely to prices, has recently hovered around 3.69%, the highest level since 2010.

High yields on government bonds can reduce the appeal of stocks. Tech stocks are particularly sensitive to rising yields because their value rests heavily on future earnings, which are discounted more deeply when bond yields rise.

Michael Hartnett, chief investment strategist at BofA Global Research, believes higher inflation will push U.S. Treasury yields up to 5% over the next five months, fueling a selloff in both stocks and bonds.

“We’re saying that new highs in earnings equate to new lows in stocks,” he said, predicting the S&P 500 will fall as low as 3,020, at which point investors should “fear” stocks.

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

“Based on our client discussions, most equity investors have accepted the view that a hard-down scenario is imminent,” Goldman analyst David Kostin said. read more

Investors look for signs of a tipping point that indicates a bottom is near.

The Cboe Volatility Index, known as Wall Street’s fear gauge, rose above 30 on Friday, its highest point since late June, but below the 37 average that has marked past market sell-offs since 1990.

Bond funds are registered flows BofA said in a research note, citing EPFR data, that $7.8 billion was withdrawn from equity funds in the week to Wednesday of $6.9 billion, and investors moved $30.3 billion into cash. Investor sentiment is the worst since the global financial crisis in 2008, the bank said.

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

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

Still, some on Wall Street say the cuts may be excessive.

“Selling becomes discrimination,” wrote Keith Lerner, chief investment officer at Truist Advisory Services. “An increase in the likelihood of a June S&P 500 downside could fuel deeper fear. Fear often leads to short-term bottoms.”

Jake Jolly, chief investment strategist at BNY Mellon, said the key signal to watch in the coming weeks will be how sharply corporate earnings fall. The S&P 500 currently trades at about 17 times expected earnings, well above the historical average, suggesting that a recession has yet to be priced into the market.

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

“The only way we’re going to see incomes not decline is if the economy is able to avoid a recession, and right now it’s not looking the most attractive,” he said. “It’s very hard to be bullish on stocks until the Fed prepares for a soft taper.”

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

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