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Two major banks expect more pain for U.S. equities -Breaking

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© Reuters. FILE PHOTO – Traders are seen on the New York Stock Exchange’s trading floor in Manhattan. New York City. U.S.A, May 18th, 2022. REUTERS/Andrew Kelly

By Saikat Chatterjee

LONDON (Reuters] – The U.S. stock market is expected to suffer more after two major banks posted their worst single-day losses in the past two years.

A report was published Thursday. Barclays (LON: ) Several factors are causing pressure on margins of U.S. businesses and forward earnings. These include the severity of China’s COVID lockdowns, the war in Ukraine, and the hawkish attitude of the U.S. Federal Reserve.

In a note they stated, “Given numerous negative near term catalysts for SPX,” they believed that risks remain strongly stacked towards the downside.

The index was hampered by underwhelming earnings from the FAANG group, which includes Meta Platforms (NASDAQ;), Amazon.com(NASDAQ:), Netflix.com (NASDAQ.) and Alphabet. In seven years, the biggest negative impact on the index was the weakest results.

Barclays also stated that the fiscal stimulus provided during the pandemic led to record goods consumption as lockdowns were lifted and consumers have spent more money on their purchases. These two factors have resulted in strong earnings for corporations over the last two years.

Support for earnings wouldn’t be as strong now that consumers have switched to services.

Goldman Sachs (NYSE) analysts estimated that the likelihood of the U.S. entering a recession within the next two-years was 35%.

Additionally, the behavior of investors in the U.S. stock exchange, which rotated out certain types of shares into others, indicated that they believed there was a higher chance of a market downturn.

The S&P 500 is down more than 18% so far in 2022 and the Nasdaq has fallen about 27%, dragged lower by tumbling growth stocks. Almost two-thirds of S&P 500 stocks are down 20% or more from their 52-week highs, according to Refinitiv data.

Goldman Sachs reported that U.S. stock prices have dropped by 24% between peak and trough in twelve recessions after World War Two.

Stocks would be 11% lower if they experienced a decline like that from January’s peak. The average decline from peak to current market levels would be 18%.

The U.S. investment bank strategists stated that dividend futures were a market indicator which priced an outcome in line with recession. Dividend futures implied S&P 500 dividends would fall by nearly 5% in 2023.

In the past 60 years, trailing four-quarter S&P 500 dividends had never fallen on an annual basis outside of a recession, Goldman Sachs said.

According to data, even the most contrarian retail investors are making a profit in these recent market selloff episodes.

JP Morgan said that the intra-week selling of retail traders was at its worst since March 2020. Charles Schwab (NYSE) net assets saw outflows of their first ever since 2020.

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