Major indexes extended their losses last week amid mixed tech earnings results and concerns over rising rates, with the Dow Jones, S&P 500 and Nasdaq all closing at their lowest levels since January. The market is bracing for the Federal Reserve’s upcoming meeting this week along with Apple’s quarterly results, events that could further pressure stocks.
The Dow sank 2.1% for the week to 29,296, its weakest close since January 2022. The blue-chip index is down over 15% for the year as investors weigh the impact of aggressive Fed tightening. The S&P 500 lost 2.5% for the week to 3,639, its lowest finish since March 2022. The index has now given up over 20% from its all-time high, solidly in bear market territory.
The tech-heavy Nasdaq fared slightly better but still posted a weekly decline of 2.6% to 10,575. The composite managed a small gain on Friday, buoyed by shares of Amazon.com. But like the S&P 500, the Nasdaq remains deep in a bear market, more than 30% off its November 2021 peak.
All three major indexes have violated their 200-day moving averages, a key long-term trendline watched closely by technical analysts. The persistent downside momentum indicates traders see limited catalysts for a rebound anytime soon.
“This is still a market under pressure,” said Matt Maley, chief market strategist at Miller Tabak. “Even on days when tech or other high-beta groups move higher, it’s happening in conjunction with defensive stocks also rallying. Until we see investors taking more speculative positions again, it’s unlikely a new uptrend takes hold.”
Much of the selling last week originated after a mixed bag of quarterly results from megacap technology and social media companies like Microsoft, Alphabet, Meta Platforms and Amazon. Strong earnings were offset by disappointing forward guidance, a trend that has weighed on tech shares throughout 2022.
Investors are also positioned cautiously ahead of the Fed’s monetary policy announcement this Wednesday. While no change to interest rates is expected, traders will parse the central bank’s latest economic projections and listen closely for clues on the path forward for rate hikes.
The Fed has lifted its benchmark rate by 0.75 percentage point at each of its last three meetings in the most aggressive tightening since the 1980s. But recent data pointing to ebbing inflation has fueled optimism the central bank could slow the pace of hikes going forward.
“The Fed wants to be sure they’ve broken the back of inflation before taking their foot too far off the brake,” said Bill Sterling, global strategist at GW&K Investment Management. “We’ll be watching closely for signals they may downshift soon to quarter-point moves.”
All eyes will also be on Apple following its quarterly report Thursday after the close. The iPhone maker is battling supply chain headaches and signs of waning demand in China that have pressured its stock over 20% lower in 2022. Apple’s results will provide critical insight into discretionary spending and give clues as to whether further economic weakness lies ahead.
As major indexes plumb new lows, most areas of the market remain under intense selling pressure. Small caps as measured by the Russell 2000 tumbled to levels not seen since November 2020. The benchmark lost 2.5% last week and is approaching its COVID bear market low.
Equal-weighted indexes like the Invesco S&P 500 Equal Weight ETF (RSP) are also badly lagging their cap-weighted counterparts, indicating the downturn is being driven by a narrow group of the largest technology stocks. RSP fell 2.45% last week to undercut its previous 2022 trough.
“We need to see more stocks participate to signal an enduring bottom is taking hold,” said Goran Skoko, head of research at Two Creeks Capital. “The rally attempt early last week failed because it was driven by the same mega-cap tech names in indexes that were already deeply oversold.”
Even defensive sectors could not escape the selling, with stalwarts like health care, real estate and utilities all ending at least 3% lower on the week. The rout indicates cash is still king in most portfolios as investors prepare for more volatility around the Fed and ahead of the midterm elections.
“It’s a very tough tape right now,” said Sterling. “Conditions still favor raising cash and being selective until technical indicators and market internals improve.”
With many areas of the market trading deep in bear territory, valuation-focused investors are starting to wade back in. Beaten-down shares of megacaps like Microsoft, Meta Platforms and ServiceNow are approaching potential buy points.
But with major indexes and most stocks still struggling to find their footing, timing entries remains a critical challenge. The S&P 500 needs to claw back above its 200-day line and reclaim its 21-day average to even begin signaling a short-term trend shift.
“There are some world-class companies getting closer to attractive long-term entry points for patient, risk-tolerant investors,” said Skoko. “But we would still wait for more concrete signs of a rally before getting significantly more bullish.”
Until proven otherwise, the path of least resistance for stocks still appears to be lower. But with bears remaining in control and many risky assets down 30% or more in 2022, the backdrop may be developing for a bullish reversal in the new year.
