As concerns over a looming recession push stocks to five-week lows, a growing rash of experts warn the volatility should only continue in the coming weeks, as uncertainty grows over the holidays and into the start of earnings season next month, when corporations are poised to reveal just how much the cooling economy has put a dent in corporate profits.
Although investors have cheered data signaling inflation appears to have peaked, “there hasn’t been much of a change” in the Fed’s commitment to reigning in prices by slowing down the economy, Brian Price of Commonwealth Financial Network said on Thursday, pointing to the central bank’s hawkish policy announcement this week as evidence.
As stocks tanked, Price warned markets might be prone to “wider swings” in the last two weeks of the year given the absence of important economic data releases—fueling uncertainty over the state of the economy.
What follows may be worse: In a Tuesday note, Morgan Stanley analysts warned “the high risk” of an earnings recession could push the S&P 500 down to 3,000 points some time in the first quarter, erasing as much as 24% in value as the effects of aggressive Fed policy ripple through the economy and hamper corporate earnings.
The analysts believe companies will start cutting profit expectations during the fourth-quarter earnings season beginning in mid-January and running through February—ushering in the steep market decline as companies start to face lower sales in addition to higher costs.
Morgan Stanley’s Katy Huberty acknowledges the call is “widely viewed as too aggressive” by other Wall Street analysts, but the investment bank also correctly predicted this year’s bear market and holds a year-end price target of 3,900—roughly in line with current levels.
“Things will get worse before they get better,” says Bank of America analyst Savita Subramanian, positing the S&P will fall a less-severe 14% to 3,400 by next summer as corporate earnings fall between 10% to 15%.
The stock market tanked Thursday, with the Dow Jones Industrial Average at one point tumbling more than 900 points. Morning data showed retail sales deteriorating more quickly than experts projected—fueling concerns the nation could be headed into a recession after the Fed on Wednesday reiterated its commitment to lowering inflation, even if it further hurts the economy. The Dow is down 9% this year, and the tech-heavy Nasdaq has cratered 32%.
“The upcoming earnings season will be as critical as ever as investors will start to get a sense for how the inflationary environment is impacting company [profits],” says Pride. “If we do see an uninspiring earnings season then it’s hard to see how we don’t have a continuation of the volatile trading environment that has characterized much of 2022.”
According to Goldman Sachs, 2022 is likely to end up as the sixth-most volatile year since the Great Depression. The VIX Index, a measure of market volatility known as Wall Street’s “fear gauge,” spiked to a one-month high of 25 points this week.
Dow Plunges 900 Points After Retail Sales Post Biggest Drop In Nearly A Year (Forbes)
Fed Raises Rates Another 50 Basis Points—Signals More Hikes To Come Next Year (Forbes)
Inflation Hits Nearly One-Year Low—But These Prices Are Still Rising The Most (Forbes)