Why the S&P 500 Index Is Poised to Move Lower This Week

Technology stocks are experiencing a sell-off similar to the dot-com bubble. Last week, the Nasdaq Composite Index fell close to 4% marking the seventh straight week of decline. It was the longest losing streak for the index in the last 21 years.

The triple whammy of inflation, geopolitical tensions, and higher interest rates continue to weigh heavily on investor sentiment. Add the impact of lockdowns in China as well as rising commodity prices and it seems like a recipe for disaster. We can understand why several economists are forecasting a global recession by the end of 2022.

The Federal Reserve will continue to raise interest rates to combat inflation. So, higher costs of capital coupled with lower consumer spending will impact the bottom line of corporates in 2022.

The Nasdaq index is down almost 30% below compared to record highs while the S&P 500 index briefly entered bear market territory on Friday, indicating a decline of 20% from all-time highs.

Will the S&P 500 decline in the upcoming week?

A key catalyst for the equity markets this week will be the quarterly results of retailers such as Costco (NASDAQ: COST) and Best Buy (NYSE: BBY). Additionally, personal consumption expenditures or PCE data which includes data on income, inflation, and spending will also be released in the upcoming week. 

Last week less than impressive results by Target and Walmart drove equity indices significantly lower on fears of lower consumer spending and falling profit margins.

So, is the equity market bottoming out or will there be more pain for investors going forward? In the last three markets where there was no recession, the S&P 500 declined by 21.3% on average. However, in the case of a recession, the average decline for the stock market stood at 47.9%.

A weak macroeconomy also impacted networking giant Cisco (NASDAQ: CSCO) as the company projected a revenue decline in the current quarter. Cisco stock fell 13% after it reported its quarterly results last week after it explained the guidance reflects the decision to cease operations in Belarus and Russia, in addition to supply chain disruptions arising from lockdowns imposed in several Chinese provinces.

Cisco stated, “Given this uncertainty, we are being practical about the current environment and erring on the side of caution in terms of our outlook, taking it one quarter at a time.”

What next for investors?

In addition to PCE data, investors will be closely watching the new home sales data for April as well as indicators for durable goods consumption both of which might show an improvement.

It makes sense for investors to focus on companies that are defensive in nature and that enjoy a certain amount of pricing power in the current investing environment which is volatile and uncertain. Further, over the near-term, projected earnings growth, depressed multiple, and high short interest ratios are likely to impact stock prices.

In addition, investors can also look to buy value stocks that are trading at a discount to benefit from market-beating returns.

Related: Tips To Avoid Losing It All When a Recession Hits