The stock market ‘has cracked this year,’ strategist says, and there are 2 things to watch for next

As the economic slowdown affects revenues, corporations are reviving the “trust the process” slogan popularized by the Philadelphia 76ers in the post-Iverson era.

Markets, for their part, have already started pricing in the risk of a recession, with the S&P 500 and Nasdaq falling into bear markets this year — 20% and 32% year-to-date, respectively — while the Dow is down more than 9%. .

Liz Young, head of investment strategy at SoFi, told Yahoo Finance Live: “The market is first, so the market has broken this year” (video above). “The market showed us its pessimism.

The market decline is largely due to the Federal Reserve aggressively raising interest rates, thereby slowing the economy due to inflation for decades: Fed Chairman Powell recently acknowledged the risk of the economy heading into recession, but said he would not stop raising interest rates in this moment will be “too early”.

“Until we see consecutive months of inflation coming down effectively, I expect them to continue to travel and continue to tighten,” Young said. “I think they’re very comfortable with getting tougher and then trying to apologize to the markets later with the tools they’re supposed to stimulate.”

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Meanwhile, Yang suggested investors watch for two other signs that the business cycle may be turning.

Decrease in income

According to Yang, a significant drop in revenue could be the next shoe to drop. The market has not seen a wave of downward revisions in earnings estimates since the outbreak of the coronavirus pandemic.

“I think the part that hasn’t been fully priced in is the decline in revenue,” he said.

In a note dated Nov. 4, Goldman Sachs cut its earnings target for the S&P 500 for the rest of the year and also through 2024. The bank now sees revenue for 2022 at $224, up from $226. Additionally, the company’s strategists revised their earnings expectations for 2023 to $224 (previously $234) and to $237 in 2024 (from $243).

This image was created by Yahoo Finance using the Dall-E AI image generator.  (OpenAI)

This image was created by Yahoo Finance using the Dall-E AI image generator. (OpenAI)

Yang added that if the U.S. were to enter a recession, he expects revenues to drop 10 to 15 percent. At the same time, he noted that the decline in income due to inflation varies across sectors.

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“Inflation in goods is likely to come down faster and to a more manageable level than inflation in services, which tends to be stickier and includes things like rent, and businesses are also dealing with sticky wage inflation,” Young said. “Therefore, sectors that are commodity-intensive and can benefit from lower inflation and lower commodity prices are likely to do better and may not be as profitable.”

Economic problems

The U.S. unemployment rate is currently near a 50-year high, and the Fed sees a broadly overheated labor market, with the demand for workers outstripping the supply of labor market participants.

But that could change as the Fed continues to raise interest rates.

“The last half of the puzzle is that the economy is slowing and you’re seeing real data in the economy, the labor market, inflation is coming down, that jobs are actually going down,” Young said.

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The bright spot for investors is that by the time the economic data stumbles, the stock market may already be in a recovery mode, as stocks end before the recession ends.

According to JPMorgan’s historical data, on average, the S&P 500 bottoms three months after a recession begins and hits a cyclical low 10 months before a recession ends.

“A recession is very likely at this point — that doesn’t mean it has to be bad, that doesn’t mean it has to be Armageddon,” Young said. “Recessions reset business cycles, and that can be positive in this environment.”

Bradley Smith is an anchor at Yahoo Finance. Follow him on Twitter @thebradsmith.

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