By Lewis Krauskopf

NEW YORK (Reuters) -Wild swings in stocks and a sharp run-up in government bond yields are putting the spotlight on next week’s U.S. inflation data, as investors brace for more volatility across assets.

Market volatility ended this week with an increase in Treasury yields, their highest levels in over two years. This was after strong U.S. employment data fuelled expectations for a more hawkish Federal Reserve.

Robust data on inflation – which hit its highest annual level in nearly four decades in December – could further bolster the case for a more aggressive Fed and extend the climb in yields, dulling the allure of an equity market struggling to rebound from last month’s tumble.

According to Reuters, Thursday’s U.S. Consumer Price Index for January will be released. It is anticipated to rise 0.5% and result in an annual increase of 7.3%. This would mark the highest such increase since 1982.

“We could potentially get a very difficult number to digest next week on the inflation front and that has the potential to cut the markets off at the knees,” said Jack Ablin, chief investment officer at Cresset Capital Management.

As investors consider at least five Fed rate increases this year, the yield on U.S. Treasury notes of 10-year maturity has increased by 40 basis points to 1.9%.

While the climb has been a drag on equity overall, it has also contributed to steep falls in many shares of tech or growth stocks. Their valuations are dependent on future profits which are less attractive as bond yields rise. As of the beginning of the year, the benchmark index is at 5.6%. The tech-heavy Nasdaq has seen a close to 10% decline.

“The reason why people are hitting the reset button … is because valuations were pulled forward a lot,” said King Lip, chief strategist at Baker Avenue Asset Management. “With rising rates, the valuations just can’t be justified. Stocks that have a slight miss in earnings are often punished.

The forward price-to-earnings ratio for the S&P 500 has fallen to 19.5 times from 21.7 times at the end of 2021, while the forward P/E for the S&P 500 tech sector has dropped to 24.4 from 28.5, according to Refinitiv Datastream.

Some investors think stocks will continue to decline before becoming attractive. According to analysts, Morgan Stanley (NYSE:) on Friday urged clients to sell into equity rallies as “a tightening Fed historically brings lower returns and great uncertainty for equities” and wrote that the S&P 500’s fair value is closer to 4,000. On Friday, the benchmark index rose 0.5% to 4,500.

Many are asking whether growth stocks which have led markets higher over the years may be losing leadership to “value stocks”, comparatively cheaper stocks that can do well in rising rates or an inflationary environment.

The S&P 500 value index, replete with shares of energy firms, financial companies and other economically sensitive names, had declined 1.4% so far this year as of Thursday, versus a 10.2% drop for its S&P 500 growth counterpart. The disparity could be as close as the biggest outperformance of growth over value in 20 years.

John Lynch, Comerica’s chief investment officer (NYSE: Wealth Management), stated that investors are now seeing steadily higher interest rates.

Markets were also digesting high-profile earnings reports. Google parent Alphabet Inc and Amazon.com Inc (NASDAQ) shares rose after each quarter’s reports, while Meta Platforms Inc plunged following the dour outlook of its owner.

Walt will be reporting next week Disney (NYSE) Co, Coca-Cola Twitter Inc Nvidia Corp (NASDAQ:) will be reporting the next week.

Investors warned that any reports that are disappointing, especially those from high-value companies, could lead to severe market fallsout.

“It’s been a volatile start to the year with investors swinging between concerns over Federal Reserve tightening and confidence in the economic recovery,” Art Hogan, chief market strategist at National Securities, said in a research note. Meta aside, solid earnings prospects are helping to reduce uncertainty.