Market Snapshot: S&P 500 dips to nearly 2-year low as stocks head for 5th straight decline

What’s driving markets

Traders’ risk appetite was expected to remain limited by concerns the Federal Reserve’s desire to combat rampant inflation with still-higher borrowing costs will hurt economic activity and crimp corporate earnings.

“This is an awful stock market environment that is grappling with a weakening economy, uncertainty over earnings and how long the Fed’s tightening will last, and sentiment issues with an extremely risk averse investor psychology,” said David Bahnsen, chief investment officer at The Bahnsen Group, a wealth management firm based in Newport Beach, Calif. with $3.85 billion in assets under management.

“While we believe a recession is inevitable, it’s impossible to factor this into an actionable stock market view because we don’t know how much recession risk is already priced into markets,” he said, in emailed comments. “There is a significant chance that by the time we are in a recession, markets will already be pricing in the recovery, as markets are forward looking.”

See: Robert Shiller created an index that shows investors’ fear of a stock market crash. Here’s what it’s saying now.

The policy-sensitive 2-year Treasury yield
TMUBMUSD02Y,
4.278%
on Tuesday pulled back after rising above 4.3%, near its highest level since 2007. The short-duration benchmark was nearly 400 basis points lower a year ago before the Fed embarked on a rate hiking campaign to tackle consumer price rises running at their fastest pace in 40-years. The 10-year Treasury yield
TMUBMUSD10Y,
3.907%
briefly popped above 4% again in early trading but was at 3.923% in recent trade.

The Bank of England said Tuesday that it would expand its daily U.K. bond purchase operations to include index-linked gilts, the second move this week aimed at trying to calm market volatility.

The International Monetary Fund cut its outlook for economic growth in the United States to 1.6% this year, down from a July forecast of 2.3%. It expects meager 1% U.S. growth in 2023.

JPMorgan Chase
JPM,
-1.74%
CEO Jamie Dimon has warned additional rate rises will be particularly painful, and the S&P 500 could fall by another 20%. The benchmark is already down 24.2% so far in 2022. The tech-heavy Nasdaq Composite has shed 32.6% over the same period and sits at its lowest since July 2020.

“With the U.S. 10-year yield back at the 4% level this morning, we expect the pressure to continue in U.S. equities and our thesis is also that the upcoming Q3 earnings season starting this week will lead to earnings downgrades and disappointments in the outlook,” said Peter Ganry, head of equity strategy at Saxo Bank.

Deep Dive: The stock market is in trouble. That’s because the the bond market is ‘very close to a crash.’

JPMorgan Chase on Friday will help kick off the third-quarter corporate earnings season alongside peers Citigroup
C,
-1.37%
and Morgan Stanley
MS,
-1.52%.
Analysts expect S&P 500 index aggregate earnings will grow by 4.5% for the period, though much of this is driven by an expected 6.3% gain for energy stocks, according to Refinitiv. Financials’ earnings are forecast to fall 1.6%.

The market must contend with U.S. producer prices data on Wednesday and the consumer prices data on Thursday, reports that should further impact investors’ thinking on the Fed’s policy trajectory.

The dollar
DXY,
-0.08%
has been propelled sharply higher by the Fed’s relatively aggressive rate-hiking cycle, and the currency’s strength is seen as yet another headwind for the earnings of U.S. multinationals. The ICE U.S. Dollar Index backed off 0.2% on Tuesday.

Companies in focus

• Shares of Coinbase Global Inc.
  COIN,
  +4.15%
  fell 0.6% after the digital currency brokerage firm said it inked a deal with Google, a unit of Alphabet Inc., to use Google Cloud as its strategic cloud partner to build advanced exchange and data services.