Scarier days lie ahead for the stock market, according to Mizuho Securities.
While the S&P 500 index
has fallen about 25% from its peak this year, there’s “more pain to come” for equity-market bulls embarking on a “misguided ‘buy the dip’ strategy,” Mizuho’s team of U.S. economists warned in a Tuesday client note.
Such thinking “ignores the essential difference underlying the post-Covid macro environment and that which existed between 1990 and March 2020 when the Trump administration initiated the lockdown to curb the spread of the virus,” argued Steven Ricchiuto, chief U.S. economist at Mizuho, and economist Alex Pelle.
But with inflation running near a 40-year high, the Federal Reserve will keep “chasing the terminal rate that causes the labor market to crack.” That means long-term yields will be “dragged higher” to achieve a sustained pullback in U.S. living costs, but also resulting in increased risk to earnings and real growth, they said.
The 10-year Treasury yield
hit 3.938% on Tuesday, its second highest level of 2022, according to Dow Jones Market Data. The benchmark is used for pricing everything from consumer loans to corporate debt.
See: Fed’s Mester says there’s been no progress on inflation, so interest rates need to move higher
The S&P 500 index closed at 3,588.84 on Tuesday, booking its second lowest finish of the year, according to Dow Jones Market Data. It peaked at 4,796.56 in January.
Market Snapshot: Nasdaq ends at 2-year low as U.S. stocks extend losing streak to 5 days
Instead of “expecting the Fed to come to the rescue after each step lower” for stocks, Mizuho’s team sees another fall of 10% or 11% for the S&P to 3,200 “before valuations become supportive.”
With third-quarter corporate earnings reporting picking up later this week, the team pointed out that bottom-up analysts continue to call for a 8% to 10% increase in operating earnings in 2023.
“Marginally positive real GDP and a wage-induced margin squeeze suggest bottom-up analysts still have to take down their earnings estimates for the balance of this year and next,” they said.
Big banks JPMorgan Chase & Co.
Wells Fargo & Co.
and Morgan Stanley
kick off quarterly earnings for the financial sector on Friday, against a jittery backdrop featuring recession risks and slower investment-banking activities alongside higher interest rates as the Fed has looked to tackle high inflation.
See: JPMorgan and Goldman are still top dogs in investment banking but business shrinks significantly in 2022