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Will FOMC Spark A Massive Stock Market Correction?

By (Thomas Hughes)Stock MarketsMay 03, 2022 12:51PM ET
Will FOMC Spark A Massive Stock Market Correction?
By (Thomas Hughes)   |  May 03, 2022 12:51PM ET
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Stock market action on Friday, April 29th, was very bearish for the major indices, including the S&P 500. The index moved steadily lower throughout the day as investors, traders, and speculators bet on what was to come this week. What comes this week is the FOMC meeting, and it is one the market should fear. As much prep as the FOMC has done, we don’t think the market is really pricing in what the Fed is about to do. At least, not the average investor because price action has been looking bearish for some time.

The Fed, when it hikes rates on Wednesday, is going to hike rates by at least 50 basis points and continue to hike rates by at least 50 basis points per meeting until the end of the year or longer. The CME’s Fedwatch Tool is pricing in at least 12 quarter-point hikes by the end of the year, which will put rates over 3.0% and the highest level in over 15 years, from right before the Housing Bubble popped. The jolt to the economy, an economy that was already fragile and feeling the impacts of inflation, will probably stall and could enter a deep recession, but the more important factor is that S&P 500 earnings growth is perhaps over.

The S&P 500 Index Is At A Critical Juncture

The S&P 500 index is at a critical juncture. The price action on Friday was bearish, with selling persisting into the close and leaving the index at the lowest level since February. It is still technically above support, but price action is down in early trading on Monday, and there is a lot of risk in the market. Right now, our support target is at the 4,100 level. This is the lowest low of the correction so far. A move below that level would confirm at least the near-term downtrend, but there is a possibility of a much deeper correction.

S&P 500 Daily Chart
S&P 500 Daily Chart

In that scenario, we would expect to see the market react fairly quickly and lead to a retest of 4,100 for resistance. If that level can’t be regained quickly the odds of a pullback to a deeper support level rise. In that scenario, price action in the S&P 500 could pull all the way back to 3,700, 3,200, or even 2,800 depending on how bad the recession is. As for recession, GDP has already contracted for one quarter, all it takes is one more for that to be a reality. If the FOMC is overly aggressive, as in more aggressive than what is currently priced into the market, we favor the hard-landing scenario.

The Outlook For S&P 500 Earnings Isn’t As Good As It Looks

The S&P 500 is still producing earnings growth and the outlook is positive but there are many red flags to be aware of. The first is that Q1 results are tepid and growth is slowing on a YOY basis. The average company is beating the consensus estimate but fewer than average and by a very slim margin, only a few hundred basis points, which suggests to us what growth there is well priced in. The second is that most of the growth and outperformance are really the results of the Energy sector. The Energy sector is outperforming its very high 245% earnings growth consensus by double digits and the forward estimates are up strongly as well. The takeaway is that “S&P 500” earnings growth is present but mostly in the Energy sector. If the economy takes a hit from the FOMC the average S&P 500 company could easily fall into an earnings recession.

The Technical Outlook: The S&P 500 Is Testing Support

The S&P 500 is testing support at 4,100 and might break through. If that happens after the FOMC announcement and the market doesn’t bounce back quickly we think the market is in for a deep, deep correction. The risk is in the FOMC however, and how the market takes the news, so we aren’t making any big trades before then.

ES Futures Daily Chart
ES Futures Daily Chart

Original Post

Will FOMC Spark A Massive Stock Market Correction?

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Will FOMC Spark A Massive Stock Market Correction?

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