Two major banks expect more pain for U.S. equities

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[May 19, 2022]  By Saikat Chatterjee

LONDON (Reuters) - Two major banks expect more pain for the U.S. stock markets after benchmark indexes posted on Wednesday their worst one-day losses in two years.

In a report published on Thursday, Barclays strategists said margins for U.S. companies and their forward earnings were under pressure due to a combination of factors, ranging from severity of China's COVID lockdowns to the war in Ukraine and the U.S. Federal Reserve's hawkish stance.

"Given the numerous negative near-term catalysts for the SPX we believe that the risks remain firmly stacked to the downside," they said in a note, referring to the S&P 500.

A key drag on the index had been underwhelming results posted in the current earnings season by the high-flying FAANG group - Meta Platforms, Apple, Amazon.com, Netflix and Alphabet - Barclays said. The weak results had been the largest negative contribution to the broader index in seven years.

Moreover, fiscal stimulus unleashed during the pandemic had resulted in record consumption of goods as consumers spent during lockdowns, Barclays said. This had translated into strong corporate earnings in the past two years.

Now that consumer spending was switching to services, support for earnings would not be so strong.

Separately, Goldman Sachs strategists estimated a 35% probability of the U.S. economy entering a recession in the next two years.

Furthermore, investors' behaviour in the U.S. stock market, rotating out of some categories of shares and into others, suggested they were pricing in even greater odds of a downturn.

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Traders work on the trading floor at the New York Stock Exchange (NYSE) in Manhattan, New York City, U.S., May 18, 2022. REUTERS/Andrew Kelly

The S&P 500 is down more than 18% so far in 2022 and the Nasdaq has fallen about 27%, dragged lower by tumbling growth stocks. Almost two-thirds of S&P 500 stocks are down 20% or more from their 52-week highs, according to Refinitiv data.

Goldman Sachs said that in 12 recessions since World War Two, U.S. stocks had fallen from peak to trough by a median of 24%.

A decline of that magnitude from the January peak would take stocks 11% below current market levels. An average drop from the peak would be 18%.

Dividend futures represented a second market indicator pricing an outcome consistent with recession, the U.S. investment bank's strategists said. Dividend futures implied S&P 500 dividends would fall by nearly 5% in 2023.

In the past 60 years, trailing four-quarter S&P 500 dividends had never fallen on an annual basis outside of a recession, Goldman Sachs said.

Even retail investors, typically contrarian in recent market selloff episodes, are selling, according to data.

Intra-week selling by retail traders was the worst since March 2020, according to JP Morgan. Charles Schwab net assets suffered outflows for the first time since 2020.

(Reporting by Saikat Chatterjee; Editing by Bradley Perrett)

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