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Equities Witness Selloffs and Markets are in Churn

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In yet another interesting week, prominent investment houses are warning that the upswing isn’t likely to last. In the year so far, these kinds of reports have become increasingly accurate.

In a recent report released by Morgan Stanley, the bank’s researchers state that the S&P 500’s constituent earnings are now broadly trending to be negative for Q4:

Websim is the retail division of Intermonte, the primary intermediary of the Italian stock exchange for institutional investors. Leverage Shares often features in its speculative analysis based on macros/fundamentals. However, the information is published in Italian. To provide better information for our non-Italian investors, we bring to you a quick translation of the analysis they present to Italian retail investors. To ensure rapid delivery, text in the charts will not be translated. The views expressed here are of Websim. Leverage Shares in no way endorses these views. If you are unsure about the suitability of an investment, please seek financial advice. View the original at

Interestingly, this outlook changed alongside that of Q3 as previous quarters’ earnings were reported throughout this year:

On the individual consumer level in the US, inflation and the political environment reign as the top 2 concerns, with the concern over inflation rising hard while concerns over political climate are trending downwards:

Inflation isn’t just a top concern among consumers; it’s also the Federal Reserve’s stated top priority. As per a recent JP Morgan report, outlook for higher bond rates across tenors is getting increasingly stronger:

Classical market theory suggests that when bonds look more attractive, money is mopped up from the equity markets and depress forward valuations. As it stands, JP Morgan’s researchers hold the view the “Big Tech” and “Tech” are the most valued while relatively conservative sectors such as healthcare, energy and financials have also been deflating, albeit to a lesser degree:

There were a number of interesting reports from Bank of America over the past week. One report stated that, based on their analysis, economic recovery can be expected to take a year longer than expected:

The bank also notes that the Consumer Price Index has lately been rising after the announcement of new fiscal policies. Thus, inflation will continue to be a major factor in decreasing consumption and also bring pressure onto equity markets.

With the current administration managing to retain its majority in at least one of two US houses of parliament, it’s quite likely that new fiscal policies will continue to put pressure on the CPI. While consumption of services continues to have a strong demand outlook, consumption of goods – which impacts consumer discretionary stocks such as Amazon – has been trending increasingly downward for a while now:

Another report stated that the ETFs based on S&P 500 have seen the largest inflows recently. This is typically a bad sign for equity valuation; since the idea of holding a smaller basket of stocks will deliver larger losses than holding broad market ETFs. ETFs based on large-cap stocks (with many constituents being potentially overvalued) have been witnesses heavy outflows:

To add to the argument that tech stocks are increasingly unattractive, growth-based ETFs have also witnessed while value ETFs have seen net inflows recently:

Healthcare ETFs – which cover a traditionally defensive sector – have been the most attractive among the bank’s clients:

While clients sold ETFs and other flavours of ETFs, they have been heavily buying into fixed income instruments:

Once again, this is a cautionary tale for investors. One the one hand, equity outflows depress stock values – which can be considered a true negative – while a switchover to ETFs creates a slight bump – which is a false positive. So far in 2022, the S&P 500 has seen a reversal of at least 1 percentage point from the day’s high or low on 162 trading days – the most daily u-turns since 2008. With fixed income markets looking better in comparison to long-term holdings in equities in general, this will create increasingly larger numbers of depress/bump cycles. While a longer-term outlook will remain murky, the cycles will create a number of tactical opportunities.

Exchange-Traded Products (ETPs) offer substantial potential to gain magnified exposure with potential losses limited to only the invested amount and no further. Learn more about Exchange Traded Products providing exposure on either the upside or the downside to the S&P 500 as well as the upside or the downside to the Nasdaq-100.

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