After an overnight slump, the Nasdaq tech index has now plunged 23% from its November 2021 peak. Here's what's causing the volatility and what the experts think might happen next.
The resilience of corporate earnings today helped to shore up market sentiment after last night’s heavy Wall Street selling on fears of a hard landing for the US economy.
Apple Inc (NASDAQ:AAPL) and Amazon.com Inc (NASDAQ:AMZN) shares closed 4% lower yesterday as the Nasdaq endured its worst session since September 2020, leaving the tech-laden index more than 12% down in April alone.
The flight from risk assets reflected stagflation fears and prospect of significantly higher interest rates as the Federal Reserve battles to get inflation back under control.
Threats to growth from China’s lockdowns and the deteriorating geopolitical situation haven’t helped as the Vix index of stock volatility set its third-highest closing level of the year.
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The S&P 500 gave up 2.8% last night, its worst daily return since the Ukraine invasion, to keep the index on track for its worst monthly performance since the start of the pandemic.
Big fallers included Tesla Inc (NASDAQ:TSLA), which shed 12% on fears that Elon Musk may have to sell some of his holding in order to finance the Twitter Inc (NYSE:TWTR) acquisition. General Electric Co (NYSE:GE) also dropped 10.3% after it warned of supply chain challenges in the company’s latest update.
Amidst the uncertainty, the majority of US corporates have delivered solid earnings for the first three months of 2021. Based on about 25% of the S&P 500 to report so far, Swiss bank UBS said that 80% had beaten expectations and by 6% in aggregate.
It said: “Cost pressures have been in focus, but consistent with recent quarters, corporate America has been successful at passing on higher expenses to its customers.”
UBS believes there remains the risk of “high-profile idiosyncratic disappointments”, particularly for beneficiaries of the Covid pandemic. This was shown when streaming giant Netflix Inc (NASDAQ:NFLX) reported weaker subscriber numbers, sending its shares down more than 30%.
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Google owner Alphabet Inc Class A (NASDAQ:GOOGL) also missed Wall Street expectations last night, but there was cheer from Microsoft as it beat forecasts due to strong demand for its cloud-based services.
The earnings performances on both sides of the Atlantic helped the FTSE 100 index to climb 50 points, while Wall Street futures markets are pointing to a steady start ahead of closely-watched figures later from Apple and Facebook owner Meta Platforms Inc Class A (NASDAQ:FB).
For now, fears about a Federal Reserve or geopolitically induced recession is likely to remain elevated until inflation figures suggest otherwise. Last week, expectations for the year end level of interest rates rose from 2.47% to 2.83% before falling back earlier this week.
In a note warning of recession next year, Deutsche Bank said: “Our view is that the Fed is behind the curve in a manner unseen in a generation, that inflation is going to prove a lot stickier than expected, and hence monetary tightening will push the US economy into a significant recession, with unemployment ultimately rising several percentage points.
Mark Haefele, UBS Global Wealth Management’s chief investment officer, takes a different view and continues to expect equity markets to finish higher this year.
He said: “While market sentiment will be fragile in the near term, with earnings downgrades capping the performance of Chinese equities, current valuations have priced in much of the negatives.
“The current near-trough valuation of 10x forward price-to-earnings ratio has already reflected the lowered earnings growth for the next 12 months, in our view.
“We expect Beijing will step up fiscal and monetary support to shore up the economy. We retain our most preferred rating for China within our Asia portfolios and continue to see areas of value.”
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