Stock market’s wild gyrations put earnings in focus as inflation crushes Fed ‘pivot’ hopes

By Vivien Lou Chen

“I don’t think any strategist or analyst who follows the market closely really thinks gains will continue into 2023,” said Dan Eye of Fort Pitt Capital Group.

The relentless inflation has dashed hopes of a quick turnaround from aggressive rate hikes by the Federal Reserve, which in turn is eroding US corporate earnings prospects for 2023 and fueling debate over whether the next major financial crisis may be imminent. September is hotter – better-than-expected CPIs, which showed annual headline inflation above 8% for the seventh straight month, left little doubt that ongoing price pressures will persist at least until the end of the year. Economists and traders are now putting a 5% interest rate target on the map for next year, a level seen as having a negative impact on corporate earnings and the stock market. It could also raise concerns about a possible market and economic collapse on the scale of the Great Financial Crisis and Recession of 2007-2009. As the third-quarter earnings season kicked off on Friday — with announcements from JPMorgan Chase & Co. JPM, Citigroup Inc. C, Wells Fargo & Co. WFC, and Morgan Stanley MS — there was still a bit of hope that other companies could catch the results to exist for the time being. Shares also managed Thursday despite hot September inflation readings, which analysts attributed to investor short-covering after a six-day sell-off that left the S&P 500 at its lowest level since November 2020 on Wednesday. Read: Why stocks enjoyed an historic rebound after another hot inflation report and Thursday was “one of the craziest days of my career” in markets, says BlackRock’s Rick Rieder Kind of fantasy,” said Dan Eye, chief investment officer of Fort Pitt Capital Group of Harrisburg, Pa., which has $5 billion in assets under management. “I don’t think any strategist or analyst who follows the market closely really expects gains to hold into 2023. We’re in a situation where the question is how far they need to be cut.” The S&P 500 Index continues to trade in “a falling channel” that has been going since exists in mid-August. Friday’s S&P 500 drop below 3,600 keeps sellers “hopeful for further downside,” while a break below 3,490 would open the door to the 3,390 level reached in February 2020, she said.

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The September CPI report “confirms fears that inflation is much more persistent and much more embedded in the economy than we might have previously thought, and that the process to bring inflation down will take much longer than initially anticipated,” Cincotta said by phone. “That means the Federal Reserve will have to hike rates more aggressively for longer, which will be bad news for economic growth and means a recession is more likely.” Stocks are trading at levels that imply “a more aggressive Fed and higher interest rates.” for an extended period of time.” With stock prices still trading at 17.8 times earnings per share, according to her estimates, Cincotta sees a “good chance” for shares to drop another 10% over the next few months as the Earnings of consumer discretionary companies are particularly hard hit, and she said the S&P needs to get back above 3,800 for her to change her mind.

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“It feels like worst-case scenarios are being brought forward and we’re on this downward spiral right now,” she said. Read: 5 trends to follow and five points of action to take when the gains begin. And yes, inflation will run high Admittedly, corporate earnings generally held up better than expected in the second quarter, with companies like eBay Inc. (EBAY) and Best Buy Co. (BBY) posting healthy results. Similar strength was also evident in PepsiCo’s (PEP) third-quarter results released on Wednesday, which showed consumers remained willing to pay more and raised hopes that other earnings reports could be better-than-feared. is that there is “indisputable evidence that inflation is not declining,” said Thomas Simons, a money market economist for Jefferies in New York. In a note, he and colleague Aneta Markowska wrote that hopes for peak inflation and a turnaround by the Fed “were completely dashed by the September CPI report.” They also reiterated their call for a final interest rate of 5.1%, or a level at which the Fed is likely to end its rate hike campaign. Over the phone, Simons said, “I wouldn’t rule out the external risk that interest rates will have to rise above inflation.”

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For John Silvia, founder and chief executive officer of Dynamic Economic Strategy in Captiva Island, Fla., a 5% Fed Funds rate would mean “a pretty high discount factor relative to stock markets and add another 75 to 100 basis points to mortgage rates.” Funding costs will be difficult and there will be a lot fewer options,” Silvia, the former chief economist at Wells Fargo Securities LLC, said by phone. And it’s not just publicly traded markets like stocks that will take the hit, he said. Ditto for hidden secondary markets like that for secured lending obligations, which “have been developed in recent years and have never been rated at a 5% fed funds rate.” Next week’s US economic calendar shows a lack of major market-moving releases. Monday brings the release of the Empire State Manufacturing Index for October. Data on industrial production and capacity utilization as well as the NAHB Home Builders Index will follow on Tuesday. Data on building permits and housing starts is scheduled to be released on Wednesday, September, along with the Fed’s Beige Book report. Thursday brings weekly jobless claims, existing home sales, the Philadelphia Fed Manufacturing Index and leading economic indicators. An index of joint inflation expectations for the third quarter will be released on Friday.

-Vivien Lou Chen


(ENDS) Dow Jones Newswires

10/15/22 1522ET

Copyright (c) 2022 Dow Jones & Company, Inc.


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