Is this stock market sell-off overdone?

There's lots for investors to be worried about at the moment, but equally some positives to cling to. Our City expert has picked over the bones of the latest stock crash and reports his findings.

Amazon (NASDAQ:AMZN) shares near pre-Covid levels and a 38% slide for the index of 10 mega-cap tech stocks in just six months highlight the extent of the recession and rate rise fears stalking markets.

Further unwelcome milestones were reached in Wall Street’s latest sell-off last night, with the Nasdaq now down more than 25% this year at its lowest level since November 2020 and the S&P 500 below 4,000 for the first time in over a year.

Tesla (NASDAQ:TSLA) shares dived 9% on the additional impact of China supply chain issues and the distraction of Elon Musk’s Twitter (NYSE:TWTR) bid, while Amazon’s recent profit warning and the outlook for higher US rates contributed to its shares dropping another 5%.

Having soared to above $3,700 on the back of an internet spending boom, the shares are down by around 40% since November and approaching the $1,900 seen at the onset of Covid.

Amazon is part of New York’s FANG+ index, which provides exposure to 10 of the most-traded tech giants through Facebook owner Meta (NASDAQ:FB), Apple (NASDAQ:AAPL), Netflix (NASDAQ:NFLX), Microsoft (NASDAQ:MSFT), Google owner Alphabet (NASDAQ:GOOGL), Alibaba (NYSE:BABA), Baidu (NASDAQ:BIDU), NVIDIA (NASDAQ:NVDA) and Tesla.

The index boasts a rise of 28.7% between September 2014 and the end of April, which is better than 19.9% for the Nasdaq and 13.5% for the S&P 500. However, this record has taken a hammering in May after three consecutive tech-led falls for US markets.

The FANG+ is now 38% lower than its high in November, which includes its worst ever performance in April when the index dropped 18.9%. Technology and growth stocks have borne the brunt as investors anticipate the impact of a series of Federal Reserve half-point interest rate rises on the value of future cash flows.

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The geopolitical backdrop, ongoing cost of living squeeze and prospect of a slowing China economy due to the country’s zero-Covid policies have added to wider selling pressure and pushed the Vix fear index towards its highest level in a year.

The S&P 500 completed its fifth consecutive weekly decline on Friday — the longest run since 2011 — and needs a strong comeback from today to avoid a sixth week. Markets were calmer today, with the FTSE 100 index up nearly 1% and US futures pointing to a stronger session.

Much will depend on Wednesday’s US inflation figure, which is forecast to show the annual CPI rate falling from 8.5% to 8.1% and the monthly rate declining from 1.2% to 0.2%.

The April inflation print may offer some encouragement after the pandemic caused the largest surge in demand for goods since the end of rationing after the end of the Second World War.

UBS Global Wealth Management said: “While no one data point proves or disproves the inflation case, we expect base effects to start to bring inflation lower, as the data no longer compares a normal economy to one suppressed by the pandemic.

“Falling inflation over the coming months has the potential to moderate concerns about the pace of Fed tightening, in our view.”

Markets have moved swiftly to price in a rapid pace of Fed rate hikes, with futures markets currently implying around 270 basis points of tightening overall this year.

The prospect of such aggressive moves has accelerated recession fears and the flight from risk, although UBS believes there are still plenty of reasons for optimism.

Its chief investment officer Mark Haefele points out that the US added 428,000 net new jobs in April, a healthy rate that meant the unemployment rate remained low at 3.6%.

While a 5.5% increase in average hourly earnings is below the rate of inflation, job security is high and there is also little evidence of US firms looking to fire workers. Haefele said: “Consumers are thus less likely to cut spending to increase precautionary savings.”

The first-quarter US earnings season also suggests resilience as 78% of S&P 500 companies have beaten forecasts so far, slightly above the five-year average of 75%.

Weakness has mostly been concentrated in areas that face supply chain challenges, shifts in spending away from pandemic winners or stiffer competition, such as Netflix.

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Although UBS remains watchful for signs of margin erosion and slowing demand, the Swiss bank has retained its forecasts for 10% earnings growth in 2022.

Its optimism is shared by market analysts at JP Morgan after they pushed back on the “base case assumption” that the global economy is heading for recession. The US bank said its pro-risk stance continued to reflect the benefits of Covid reopening, a tight labour market and potential policy easing in China.

The bank said the past week’s sell-off appears overdone, driven by fear and poor market liquidity rather than fundamental developments.