What Should You Expect from the Markets This Week?
January 17 2022 - 04:47AM
Finscreener.org
After a stellar run since the
bear market of 2020, the broader equity indices are trending lower
in the first two weeks of 2022. The
S&P 500 Index
is down close to 3% year-to-date
while the tech-heavy NASDAQ has lost over 5% in 2022.
The ongoing sell-off in tech
stocks continued in the last week as the Technology
Select Sector SPDR Fund (AMEX:
XLK) has also declined by 5.6% year to date.
Heavyweights such as Apple (NASDAQ: AAPL), Microsoft
(NASDAQ:
MSFT),
Meta (NASDAQ:
FB),
Alphabet (NASDAQ: GOOG) and Amazon
(NASDAQ:
AMZN) are now down 4.9%,
7.3%, 2%, 3.8% and 4.9% respectively since the start of
2022.
Despite the pullback, Wall Street
remains bullish on MSFT stock and expect Microsoft’s Azure business
to benefit from increased cloud spending by enterprises. Investment
bank, Wedbush explained, “Our December quarter checks for Microsoft
have shown incremental strength again as the Azure cloud growth
story is hitting its next gear of growth in Redmond.”
The increase in Treasury Yield
rates have slowed recently as inflation numbers have gained pace
but it did not offer any respite for tech stocks. Last week,
inflation rates touched multi-year highs while weekly jobless
claims rose by 23,000 which was unexpected, but attributed to the
impact of the new COVID-19 variant.
The Omicron disruptions will be
short-lived but investors need to brace for interest-rates hikes
soon.
Bank stocks reported quarterly results
Major banking companies reported
quarterly results on Friday. Several bank stocks have outpaced the
broader markets in the past 15-months as the economy was supported
by trillions of dollars deployed via federal benefits.
JP Morgan (NYSE:
JPM) which is the largest
bank in terms of assets, beat Wall Street revenue and earnings
estimates. However, the
stock was still down by
6% on January 14. Its earnings were bolstered by credit reserve
releases and the company also warned it might miss a key profit
target in the next two years.
Citigroup (NYSE: C) shares
also fell over 1% despite beating revenue estimates, but it also
reported a 26% decline in net income. This led to a drop in share
prices of Morgan Stanley and Goldman Sachs as well which are due to
report Q4 numbers in the next week.
Wells Fargo (NYSE:
WFC) stock soared by
almost 4% after CEO Charles Scharf confirmed loan demand was robust
in the second half of 2021. Wall Street remains wary about the
rising expenses on banking companies that led to the decline last
week.
More pain ahead for tech stocks
The road has been bumpy for
technology investors in 2022 as the Federal Reserve displayed an
aggressive approach towards combating rising inflation rates. There
is a good chance that interest rates will also move higher within
the end of Q1 of 2022.
According to Alicia Levine, head
of equities, capital markets advisory at BNY Mellon Wealth
Management, “The first quarter should be rising yields, rising
rates, outperformance of cyclicals, and we think that the
long-duration growth names are going to have a challenging
quarter.”
Analysts expect earnings to rise
by 20% year over year in Q4 of 2021. However, this expansion will
primarily be driven by companies part of the energy, materials,
industrials, and discretionary sectors.
Comparatively, tech stocks are
expected to increase earnings by “just” 10% this year. It’s quite
possible for investor capital to shift towards value stocks from
growth stocks and this transition has already quickened in recent
months. For example, the Energy Select Sector SPDR
Fund (AMEX:
XLE) has risen close to 13% in 2022, compared to
the negative gains reported by XLK.
Rising interest rates might also
hurt growth stocks as it will increase the cost of debt capital
resulting in higher interest payments and a narrower
bottom-line.
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