U.S. EQUITY OUTLOOK:
- S&P 500, Dow and Nasdaq 100 tumble Wednesday as stocks sell off across the board
- Market sentiment sours after Target’s quarterly earnings miss estimates due to mounting cost pressure
- Investors fear rising inflation will begin to eat away at U.S. corporate profit margins more aggressively in coming quarters
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If investor sentiment was expected to improve and sales to decline, all hope died on Wednesday after U.S. stocks plunged into freefall and erased all earnings since last fridayhighlighting a famous adage that actions often go up the stairs and down the elevator during a bear market.
At the close, the S&P 500 plunged 4.04% to 3,923 amid widespread weakness on Wall Street as confidence in the economic outlook waned. The Dow, for its part, fell 3.57% to 31,490, ending a three-day winning streak. Finally, the Nasdaq 100 took the brunt of the selloff, crating 5.06% to 11,928, weighed down by a brutal rout in the tech space, with Apple (AAPL), Microsoft (MSFT), Amazon (AMZN) , and Tesla (TSLA) down 5.64%, 4.77%, 7.16% and 6.80%, respectively, on the day.
Sentiment deteriorated after Target (TGT), one of the country’s largest retailers, reported extremely disappointing financial results and issued a profit warning due to higher costs for freight, transport and compensation. TGT announced adjusted earnings per share of $2.19 for the first quarter against $3.06 expected, and proceeded to lower its revenue for the full year 2022 operating result to about 6% from 8% previously, sending its shares down about 25%.
While Target offered positive feedback on the health of the American consumerinvestors were still panicked, fearing runaway inflation would eventually catch up with corporate America and begin to quickly eat into their profit margins in the coming quarters. Faced with this dilemma, companies that cannot absorb rising costs could begin to pass them on to the consumer through higher prices, reinforcing inflationary forces in the economy and the need to tighten monetary policy more aggressively to calm excess demand.
Either way, in light of recent developments, equity analysts may begin to downgrade earnings forecasts, creating further headwinds for risk assets and complicating their recovery. Although the S&P 500 has the most exposure to the tech space, the issues plaguing large retailers are also present in other sectors, so there’s not much room for optimism right now. Going forward, the S&P 500 should stay on the downsideundermined by growing fears that the US economy is heading for a hard landing as the Federal Reserve continues its hawkish moves to restore price stability.
From a technical analysis perspective, the S&P 500 has yet to break through the bear market threshold like the Nasdaq 100 did, but it could do so soon if it falls to the May low around 3,855. A drop below this key support, which would officially drop the index more than 20% from its January high, could further erode sentiment and trigger more panic selling, paving the way for a retest of 3,725 March 2021 low.
S&P 500 TECHNICAL CHART
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—Written by Diego Colman, Market Strategist for DailyFX