Where Are Stocks Headed?

Sebastien Callebaut -

What Is Hiding Behind The Rebound

In the past months, investor sentiment deteriorated dramatically. In a study conducted by the American Association of Individual Investors, bears dominated bulls. At the same time, hedge funds started to cut their risky asset exposure, while institutional and individual investors had started to sell stocks.

  • Even while the fundamentals remain frightening, the mood switched two weeks ago and began to improve
  • Every big low has been accompanied by pessimism and the belief that equities are simply too dangerous

The question investors are now asking is whether this marks the starts of a fresh bull rally.

Inverted Yield Curve

Many of the high-growth stocks that had been battered for much of the year have driven the S&P 500 to an 9% increase since March 8. The benchmark index has pared its year-to-date losses to around 5.5%, after plunging by more than 12.5% early this year.

  • The move comes amid a slew of worries that rocked the stock market earlier this quarter, including the Ukraine war, rising inflation, and a significant jump in Treasury yields
  • Stocks ignored the latest indication from the bond market. Even as the widely followed US 2-year/10-year Treasury yield curve inverted for the first time since September 2019, a phenomenon that has previously foretold recessions

Still, as increasing oil and raw material prices threaten to undermine profit margins, the estimates for corporate profitability remain positive. According to Refinitiv, earnings estimates for the S&P 500 have risen since the beginning of the year, with corporations predicted to grow earnings by 8.8% in 2022.

BENCHMARK'S TAKE

  • The stellar performance of markets in 2020 and 2021 came to a halt in 2022 as investors scramble to assess the impact of sustained inflation, renewed geopolitical risks and a growing COVID-19 pandemic in China
  • The outlook still appears to be confused as the yield curve inverted, popular retail stocks doubled in the last month while inflation is hitting consumers and corporations
  • In the long term, we still expect the outlook for U.S. equities to be relatively positive as investors somewhat relinquish E.U.-based assets as the war in Ukraine unfolds

Disclaimer

Please note that this article does not constitute investment advice in any form. This article is not a research report and is not intended to serve as the basis for any investment decision. All investments involve risk and the past performance of a security or financial product does not guarantee future returns. Investors have to conduct their own research before conducting any transaction. There is always the risk of losing parts or all of your money when you invest in securities or other financial products.

Credits

Photo by Annie Spratt on Unsplash.