Wall Street’s major averages have been recovering for most of this week, ending Thursday in positive territory as tech stocks rebounded. While this has fueled speculation that bulls are returning to the market, the rally could be about to ease as Nasdaq futures fell early Friday as investors digested a fresh batch of corporate earnings and Snap’s disappointing results. This week, strategists at Goldman Sachs and others said they do not believe the bear market has yet to bottom amid fears of a recession and hot inflation. Earnings According to Sharon Bell, senior European equities strategist at Goldman Sachs, one of the key determinants of a bottom is earnings. “We don’t think this bear market is over yet,” she told CNBC’s Squawk Box Europe on Tuesday. “I think we haven’t seen earnings estimates down yet… margins are still pretty high.” She added that valuations, especially in Europe, “are definitely not at the lows you usually see during a bear market, so yes, I think there are downside risks.” Bell said the first half of this year was “pretty good” with reasonably strong economic growth and that even with high inflation, companies managed to avoid some of those additional price increases, she added. “But I think it will become harder to reach consumers and we expect margins to decrease,” Bell said. Analysts are forecasting earnings per share of $226.92 by the end of this year, or 10.05% annual growth, and $246 by the end of 2023, or 8.69%, according to FactSet. In a recession scenario, these numbers could look worse. In Europe, earnings decline by about 20-30% during an average recession, according to Bell, while the average drop in the S&P 500 over the past eight recessions has been about 14%. She said margin and earnings estimates should come down from here. “So yeah, I think there’s more [risks] The second factor in determining whether a bear market has bottomed out is peak inflation, Goldman said. In a June 14 report, Bell noted that headline inflation has exceeded 3% in the U.S. 13 times since 1950, and the S&P 500 typically fell ahead of those peaks and bounced back on average after the peaks. “The peak rallies were driven by at least one of three factors: a sharp inflection in economic growth, undemanding valuations, and falling rates,” Bell wrote. So, are we close to the peak? Bell said Goldman economists forecast headline inflation in the US to remain at current levels. over the next few months before dropping in late autumn. In the UK, it may peak in October. U.S. inflation jumped 9.1% in June from a year ago, higher than estimated and the fastest pace since November 1981. Wolfe Research expects the bear market rally to be short-lived, saying its bearish base case remains unchanged. “We primarily attribute the recent rebound to investor sentiment (which is a contra-indicator) to hitting extreme lows, which set stocks up for a strong short-term rebound,” the note said on Wednesday. In a separate note published on Tuesday, analysts at Wolfe Research said trading “is likely to remain highly volatile” as the bear market continues to rally in the coming months. The research house does not expect stocks to bottom in the medium term until investors have more clarity on the future actions of the US Federal Reserve. The firm said it believes the Fed has two main options: tighten sharply and trigger a deep recession that “crushes” inflation, or moderately tighten and trigger a milder recession that won’t solve inflation. Most analysts now expect the Fed to raise rates by three-quarters of a point this month, rather than a full percentage point as some discussed last week.
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