Market selloff's sequel is moment of truth for summer stock enthusiasts - BNN Bloomberg

That’s where true-believer bulls find themselves as momentum reverses in equity markets, with pro-stock arguments based on everything from valuations to financial conditions suddenly in question as Federal Reserve hawkishness revives. Early returns aren’t great. The S&P 500 is down 5 per cent in three days.

Valuation has been a central plank in arguments that the worst has passed for bulls in 2022. The S&P 500 is trading around 16.4 times next year’s earnings estimates, around the level where it bottomed versus 2022 forecasts 13 weeks ago. The problem with the model is its reliance on analyst predictions. Nobody is quite sure where earnings will land in 2023, and any evidence they’re crumbling would be unwelcome in this nervous market.

Stocks dropped for the third straight day on Tuesday as traders recalibrated expectations in response to the Fed indicating it will keep raising interest rates to damp inflation. The S&P 500 fell more than 1 per cent and the rate on 10-year Treasuries hovered around 3.10 per cent. At the same time, second-quarter earnings held up much better than expected, adding credence to the argument that the current selloff might not mean a full retracement of gains, said Victoria Greene, founding partner and chief investment officer at G Squared Private Wealth.

“If things get bad enough as the Fed slows down, that’s not good for earnings,” she said. “You’ve got to find that balance of we need the world to get bad enough that the Fed slow down, but we need the world to stay good enough that everybody still is profitable. And that’s the whole threading of the needle and avoiding the hard landing.”

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