The stock market fell Monday as investors debated whether the bear market rally that pulled major indexes up as much as 20% from October lows has finally come to an end, with some predicting the Federal Reserve’s ongoing interest rate hikes will only make matters worse for already struggling firms—and particularly those in technology.
The Dow Jones Industrial Average fell nearly 470 points, or 1.4%, to 33,960 on Monday, while the S&P 500 and tech-heavy Nasdaq shed 1.9% and 2.2%, respectively.
The sell-off picked up steam after morning data showed the U.S. service sector unexpectedly picked up last month thanks to an uptick in business activity and employment, according to the Institute for Supply Management—suggesting the Fed has room to cool the economy with additional rate hikes in order to tame inflation.
“This report could suggest wage pressures will remain strong,” Oanda analyst Edward Moya said in emailed comments, noting “good economic news is bad news for stocks” because it heightens the risk that Fed rate hikes will persist into next year—stocks also fell Friday after a strong jobs report further fueled the uncertainty.
In a morning note to clients, Morgan Stanley analyst Michael Wilson, who correctly called for the start of a bear market rally six weeks ago, warned rising interest rates still pose a risk to corporate earnings in the coming quarters—especially for technology and consumer-oriented businesses that are historically most vulnerable to weaker consumer demand.
Despite the overall bearishness, Wilson outlined one “net positive that cannot be ignored”: Though former tech darlings will be hard hit, Wilson believes the average stock “likely will not” hit a new low next year, as evidenced by more than 60% of stocks in the S&P trading above their average price over the last 200 days.
What To Watch For
The Fed’s next interest rate announcement is slated for December 14. Goldman Sachs economists forecast a half-point hike next month, followed by three quarter-point hikes next year. That would push the top borrowing rate to 5.25%—the highest level since 2007; however, incoming economic data could lower—or raise—these forecasts.
“This is typically how bear markets end—with the darlings of the last bull [market] finally underperforming to the degree that is commensurate with their outperformance during the prior bull market,” says Wilson of tech’s expected underperformance next year.
Stocks have rallied since October but are still facing steep double-digit percentage losses. The S&P is down 17% this year, while the tech-heavy Nasdaq has plunged 29%. In a Thursday note, JPMorgan analysts led by Dubravko Lakos-Bujas issued a similar forecast to Morgan Stanley, predicting the S&P will “retest this year’s lows” in the first half of 2023 with another 14% decline. The bank cited a “proverbial snowball” of high borrowing costs, a deterioration in consumer savings and a rise in unemployment will contribute to the market’s poor performance.