Big tech sinks stocks as clock ticks on earnings

Stocks fell across the board, with traders bracing for a key inflation reading and the start of the earnings season for clues on whether the economy is headed for a recession. The dollar rallied.

All major groups in the S&P 500 retreated, with losses in megacaps like Tesla and Apple weighing heavily on trading. Twitter plunged after Elon Musk walked away from his $44bn deal to buy the company, setting the scene for a disruptive legal battle. The euro edged closer toward parity with the greenback, which climbed as much as 1.1 per cent. Treasury 10-year yields dropped below 3 per cent.

Amid a pervasive confluence of economic challenges, investors are waiting to see if profits are holding up or if companies will cut forecasts. One reason for caution is the dichotomy between two major Wall Street forces. Analysts are betting Corporate America is resilient enough to pass on higher costs to consumers at a time when many strategists aren’t really convinced that’s the case.

“The stock market has not already priced-in any possible upcoming decline in earnings estimates from this year (or next),” wrote Matt Maley, chief market strategist at Miller Tabak. “Even if earnings estimates stay stable and especially if they decline, the stock market is going to have to fall further before we see an important bottom for this bear market.”

In fact, Maley noted that stocks are trading at valuation levels that are seen as highs – not lows. The current price-to-sales metric, for instance, is at the same level of market tops in 2020, 2018 and at the tech bubble in 2000, he added.

Price pressures, a wave of monetary tightening and a slowing global economy continue to keep investors on the sidelines even after an $18tn first-half wipeout in global equities. A US inflation reading on Wednesday is expected to get closer to 9 per cent, buttressing the Federal Reserve’s case for a jumbo July rate increase.

A combination of steep Fed hikes and economic growth fears have lifted the greenback to the highest levels since March 2020. The dollar surge will be a “massive headwind” for profits at many large US firms and another reason to expect a dimming earnings outlook, wrote Michael Wilson, chief US equity strategist at Morgan Stanley.

Billionaire investor Leon Cooperman said that a stronger dollar is indeed “negative for corporate profits.” In fact, several firms like giants Microsoft, Costco Wholesale and Salesforce have also bemoaned the impacts of the US currency’s meteoric ascent.

For Wilson, the S&P 500’s bear market will continue, and he sees fair value at 3,400-3,500 in case of a soft landing and 3,000 in a recession – a 23 per cent downside from Friday’s close.

“Markets are moving at lightening speed to discount a rollover in inflation rates, a reversal of Fed tightening and an outright recession,” wrote Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management. “A stagflationary stall is as probable as an outright recession.”

Meantime, Citigroup strategists point out that there’s a strong correlation between the Fed’s rate trajectory and earnings growth. They say it’s been common for earnings to rise as the Fed tightens its policy and to contract as the central bank switches to easing in response to economic weakness.

As big banks kick off the earning season later this week, traders will be looking for clues about the health of the consumer and spending trends as well as lending to businesses and corporate confidence. Real-estate valuations and lending may also be key for market direction, along with thoughts on the state of capital markets.

Elsewhere, Bitcoin fell again – and Wall Street expects the cryptocurrency’s selloff to get a whole lot worse. The token is more likely to tumble to $10,000, cutting its value roughly in half, than it is to rally back to $30,000, according to 60 per cent of the 950 investors who responded to the latest MLIV Pulse survey. The tally also showed that 40 per cent saw it going the other way.

Read: Bitcoin falls a fourth day to about $20,000 amid dollar strength

Crude declined amid a renewed increase in China’s virus cases, while a Russian court allowed a crucial export route for Kazakh oil to keep operating – easing some supply concerns.

Read: Oil extends drop as concerns over economic slowdown grip market