Bassanese Bites: Soft landing? – February 07 2022

Global markets

Here is the critical question of the year: can the Fed engineer a ‘soft landing’ for the U.S. economy?

In other words, can it slow the economy by enough to take the pressure off red-hot wage and price inflation without causing the economy to tip into recession, or at least suffer a significant enough downturn that corporate earnings growth also weakens in line with the existing interest-rate driven downward pressure on equity valuations. Provided earnings hold up, and it’s only a valuation de-rating that takes place, then the U.S. equity market correction should be contained to no more than 15-20% (at its recent low, the S&P 500 has already corrected by 10%). If not, a peak-to-trough drop of at least 20-30% could still be ahead of us.

Global stocks bounced back for a second week reflecting oversold conditions and broadly heartening news on the corporate earnings front. Although Meta slumped on much weaker than expected earnings, Alphabet, Amazon and Apple all enjoyed blowout results. All up, U.S. earnings in the latest reporting season are once again holding up well, as might be expected given the strong economy and evident pricing power being displayed. But markets rightly remain focused on the interest rate consequences of this growth, with U.S. 10-year bond yields pushing higher last week to 1.91%.

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