When the stock market reverses large gains into losses, as it did on Monday, it never feels good, and it feels especially worse when the losses are brought on by negative Apple Inc. (NASDAQ:AAPL) news. Investors shouldn’t give up on the notion that the market has bottomed out, though. The S&P 500 SPX is down almost 20% from its all-time high in early January, making it a difficult year. With all three major indices rising by more than 1% on Friday, there was reason for some optimism as investors reduced their expectations for a full-point rate increase by the Federal Reserve to combat soaring inflation.
on Monday, the indexes kept rising Until Apple Inc. (NASDAQ: AAPL) declared it will reduce hiring and spending. The news wiped out all of the day’s earlier gains, sending the S&P 500 down 0.8%. The Dow Jones Industrial Average(INDEXDJX:DJI) decreased by 0.7%, while the Nasdaq Composite COMP declined by 0.8%. Now, the question is whether the market has reached its bottom or whether another wave of selling will bring about new lows. The bullish or optimistic case begins with the idea that inflation may have reached its peak.
The consumer price index increased 9% year-over-year in June, despite a jump of more than 8% in May. Oil and copper prices have declined by 17 % and 33 %, respectively, from their peaks in 2022 over the previous month. Not only may this imply that the Fed’s policy of raising short-term interest rates are beginning to dampen economic demand, but oil accounts for approximately 12 % of the CPI basket of goods and services, so it could also bring the CPI down.
The primary reason why the “peak inflation” narrative is so important for the stock market is because it implies that the Federal Reserve will be less active than predicted. In recent days, the probability that the Federal Reserve will increase the federal funds rate by a full percentage point, as opposed to the three-quarters point increase anticipated a few weeks ago, has decreased. In addition, the fed funds futures market reflects a peak rate of approximately 4% and the prospect of rate reduction in the coming year.
This would be beneficial for the economy and the stock market. Nicholas Colas, founder of DataTrek said that “Whether the FOMC raises interest rates by 75 or 100 basis points a week from Wednesday is much less important to stock prices than where markets believe the Fed will stop the current rate tightening cycle.”
Long-term bond rates are also below their highs, which is consistent with the peak Fed tightening and inflation story. After reaching a multi-year high of approximately 3.5% in mid-June, the 10-year Treasury yield is now slightly below 3%. This is crucial for stock values, as the S&P 500’s forward price/earnings multiple has stabilized at approximately 16 times, down from approximately 20 times at the beginning of the year. Last week, evidence surfaced that stock values already reflect the most severe dangers. The consumer price index registered its largest increase in decades on July 13, but the stock market regained most of its losses, and the Nasdaq Composite closed the day only 0.2 percent lower. This indicates that the market has already priced in the majority of the economic danger that inflation poses.
The negative call is predicated mostly on the notion that earnings projections must decline. S&P 500 firms’ estimated earnings per share for 2022 have increased year-over-year, as interest rates have climbed and calls for a recession have intensified. According to FactSet, experts have already begun to reduce their predictions, with the 2022 forecast falling 0.33 percent in the past month. Yardeni adds, The bears argue that there is still a great deal of downside potential for stocks, as industry analysts are just beginning to reduce their profit projections. The good news is that stock prices may also reflect this development. Yardeni argues, There shouldn’t be much of a decline in the stock market due to adverse earnings revisions. Certainly, there may be suffering ahead. However, this does not necessarily imply new lows.
Featured Image: Megapixl @Ipopba
