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Major stock indexes set new highs at the start of trading on Friday, but experts at Bank of America warned in a morning note to clients that the multitude of recent highs has made the market particularly vulnerable to rising rates. interest, which could usher in a potential “painful” correction in the markets this year.
The biggest risk in the market is rising interest rates, Bank of America analysts say.
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Highlights
After closing at a record high Thursday, the Dow Jones Industrial Average hit an intraday high on Friday morning, climbing more than 100 points to 35,610 as the top performer Disney climbed 3% on surprise profit from its theme parks in the last quarter.
The S&P 500, which also closed at a record Thursday, hit a high of 4,468 as several stocks climbed on the back of their own soaring earnings, including Tyson Foods, which rose nearly 3%, and eBay. , up 2%.
But Bank of America’s Savita Subramanian warned that the S&P, after hitting three closing highs this week alone, has climbed to “statistically expensive” levels on nearly every measurement its analyst team tracks.
“Risks are on the horizon,” the Subramanian team wrote on Friday, saying inflation and slower earnings growth expected later this year point to a “painful cut” if interest rates interest still increase slightly.
They point out that Fed officials have started to “urge spending cuts,” which would involve raising interest rates to help fight rising inflation.
Bank of America predicts that the Fed’s cutback talks could start in September and help push 10-year Treasury yields, which tend to rise with the rate hike, to 1.9% by the next. end of the year. investors withdraw stocks to invest in risk-free treasury bills.
Tangent
A likely sign of market scum, several stocks this week hit record highs after warnings of slowing growth, inflated valuations and looming supply issues. E-commerce company Wish plunged 28% at the opening on Friday after the company warned slower growth would hurt revenue this year, and vaccine maker Moderna collapsed by nearly 20 % this week after analysts at Bank of America called the recent stock increase unrealistic based on the company’s financials. Meanwhile, chipmakers LAM Research and Micron Technology are down 9% to 15% since Friday amid fears that computer chip prices will drop later this year due to supply shortages.
Surprising fact
The S&P collapsed 15% in the fourth quarter of 2018 after the Fed started raising interest rates. “If Fed officials move too soon, it will obviously be a problem for the markets, as history has proven time and time again,” Tom Essaye, editor of the Sevens Report, wrote in a note on Thursday. .
Key context
As markets collapsed at the height of pandemic uncertainty in March 2020, Fed Chairman Jerome Powell pledged to use “the Fed’s full suite of tools to support the US economy “until” further substantial progress “is made towards full economic recovery. Since then, the Fed has kept interest rates at historically low levels while pumping roughly $ 120 billion into the economy each month through bond purchases, fueling stocks on an almost relentless rally. . The Nasdaq is up 85% and 115% respectively. Fears that increased government spending could cause problematic inflation have triggered bouts of volatility this year and, in recent weeks, have forced some Fed officials to rethink their policy.
What to watch out for
Experts are closely monitoring the Fed’s annual trip to Jackson Hole, scheduled for the weekend of August 28. [at the Fed’s next meeting] September 22, ”Vital Knowledge Media founder Adam Crisafulli said in a note Friday.
Further reading
Dow, S&P 500 Hit New Highs After Inflation Data, But Here’s Why Tech Stocks Keep Falling (Forbes)
Inflation keeps summer soaring, tying recent record (Forbes)
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