The Stock Market’s Biggest Risk Isn’t the Fed. It’s Earnings.

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New York Stock Exchange.

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Spencer Platt / Getty Images

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Let’s call it a dress rehearsal for a funeral.

We’re referring to the drubbing that tech stocks took last week. On the surface, it wasn’t all that bad. The Nasdaq Composite fell 0.3%, outperforming the Dow Jones Industrial Average‘s
0.9% down and the S&P 500 . Equal to‘s
0.3% drop.

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Yet the pain continued for the most expensive speculative names. iShares Expanded Tech-Software Sector Exchange-Traded Fund (ticker: IGV), which counts Salesforce.com (CRM) and Oracle (ORCL) among its biggest holdings, rose 1.6% in the past week, and Peloton Interactive (PTON), a The bar fell. The forward-thinking pandemic beneficiaries face fell 12% and lost their spot on the Nasdaq 100.

By now, we all know what’s to blame for the decline in these tech stocks. With inflation rising—the December consumer price index rose 7% year over year—the Federal Reserve has made a massive shift in monetary policy. According to the CME FedWatch tool, the federal-funds futures market is pricing in an 86% chance of a hike at its March meeting, with at least two, if not three, more coming in the rest of the year. This is bad news for speculative growth stocks, which have been hit hardest by high interest rates.

Yet if rate expectations are peaking for now, it could mean that tech stocks will look attractive once again, unless investors are forced to re-adjust tighter monetary policy again. Is. “The technology is likely to increase fishing in the next few days as rates are unlikely to increase further in the coming weeks,” writes Nordea strategist Sebastian Galli. ,[The recent selloff] Just a preview of what will happen to the technology in a year’s time.”

It’s a long way off, and investors now have earnings season to distract them, at least until the Federal Open Market Committee meeting ends on Jan. 26. It was not a great start. JPMorgan Chase (JPM) sank 6.1% on Friday, despite beating earnings forecasts as it called for rising expenses, suggesting perhaps too much good news was priced in.

This is a possibility. December retail sales data released on Friday showed a decline of 1.9% in December, not forecasting a 0.1% decline. It could be better than nothing – the Omicron edition and early holiday purchases have led to a temporary drop. But it also suggests that the fourth quarter ended, which could have an impact on earnings, says Tracy McMillian, head of global asset allocation at the Wells Fargo Investment Institute.

“Growth may slow down a little bit towards the end of 2021, so earnings are probably going to be a little lighter than they would have otherwise been,” she says.

Investors expect earnings to pick up. Tim Hayes, chief global investment strategist at Ned Davis Research, writes that while the threat of Fed rate hikes — and with them rising bond yields — may be concerning, a disappointing earnings season could be a bigger problem for the global stock market. ,[A] A broadly disappointing earnings season could lead to a decline in breadth and sales firmness that hasn’t been triggered by an increase in bond yields,” he explains.

Let’s hope it doesn’t come to that.

Write Ben Levishon at [email protected]

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