Finance

Stocks Poised For Losing February As Bank Of America Warns Fed Could Raise Rates To Nearly 6%

03/01/2023
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Topline

Major stock indexes fell in February as Wall Street digested the latest round of corporate earnings and reacted to growing expectations the Federal Reserve may hike interest rates higher than anticipated, a potential nightmare for stock prices as borrowing costs slash into profits.

Key Facts

The Dow Jones Industrial Average, S&P 500 and tech-heavy Nasdaq each fell this month, with each index largely flat in Tuesday trading.

The Dow was the worst-performing index with a 4% monthly loss, while the S&P and Nasdaq fell 2% and 1%, respectively.

The deterioration in equity prices came amid a historically bad earnings season as companies reported financials from the last stretch of 2022.

Companies listed on the S&P beat consensus analyst sales and profit estimates at their lowest rate since early 2020 in the most recent financial period, according to data compiled by JPMorgan last week.

Perhaps more worrisome for investors is the fact that less than 30% of companies revised profit guidance higher, also a three-year low, according to JPMorgan data.

And stocks could get another kick in the teeth as experts keep raising their long-term expectations for interest rates, already hovering at a 16-year high: Bank of America economist Aditya Bhave said Tuesday the Fed “might have to raise rates closer to 6% to get inflation back” to about 2% year-over-year, predicting a far higher peak federal funds rate this year than priced in by the market.

Key Background

February’s earnings-inspired dip may inspire an even worse decline in March due to the grim profit expectations, Morgan Stanley’s Michael Wilson warned in a Monday note to clients. The bond market similarly slipped in February, with 10-year Treasury yields skyrocketing 43 basis points to 3.97%, nearing its highest level since 2008 as the yield curve grows further inverted. Surprisingly immune from February’s slumping sentiment was bitcoin, which rose 1% on the month and maintained its January gains.

Crucial Quote

Sevens Report analyst Tom Essaye wrote in a Tuesday note to clients: “The economy is not yet showing any serious signs of slowing despite tighter financial conditions, and given this data, the market is right in thinking the Fed will hike rates more than previously expected.”

Further Reading

Stock Market At ‘Critical’ Level And Braced For ‘High Risk’ Of Collapse In March—Here’s What Investors Should Know (Forbes)

Fed Wants ‘Substantially’ Lower Inflation Before Easing Interest Rates—And Some Officials Backed More Aggressive Hikes (Forbes)

Source: https://www.forbes.com/sites/dereksaul/2023/02/28/stocks-poised-for-losing-february-as-bank-of-america-warns-fed-could-raise-rates-to-nearly-6/