Predicting the Direction of Wall Street: Key Drivers to Watch

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•  Feb 20 2023
 

The number of S&P companies that did not meet their forecasts was lower than expected. The managers of the companies mentioned a difficult, weak, bad quarter. So he was weak, but not a catastrophe. At the same time, according to a survey of companies conducted by the research company 22V, it turns out that now the managements are more confident about the lower forecasts.

If the Federal Bank chooses to continue raising the interest rate, the companies will not be able to profit as they expect, because the financing costs will rise. But how much can they go up already? After all, the interest rate has already risen to significant levels and the pessimists are also talking about the fact that we are close to the end of the cycle. There will be another increase, maybe two increases, maybe more, but an increase from 4% to an interest rate of 5% and even 5.5% is no longer the same as the effect created by an increase from the zero zone to 4%.

Company managers are no longer afraid of missing out in the coming quarters. They feel more confident in their results. This is good news, because the managers feel that they are already getting some kind of forward looking, they already think they are in control of the situation, unlike what was the case in the previous quarters. Maybe it's because even so, they suffered a decline in activity and they believe it's some kind of bottom.

Supply Chain Disruptions and Recession Warning

Since the end of 2021, many companies have begun to fear the coming recession. Most of them have seen how inflation around the world is starting to rise and reach peaks not seen in decades. As a result, the central banks raised interest rates in many countries, including the United States, Great Britain, the Netherlands and the European Central Bank.

Additional difficulties attacked these companies, including disruptions in the supply chains caused by the corona epidemic, and the very fact that many economists warned of a recession that may or may not come, and of the attitude of their customers, whether private customers or large companies, to prepare for a slowdown-recession.

At the same time, the wages of the workers also increased significantly in the past year, which hurts the profits of the companies and at the same time also accelerates the inflation and the wages are rolled into an increase in demand.

Drastic Measures to Meet Expectations

So company managers cancel recruitments, fire employees. Unnecessary projects are canceled, conveying weakness in business, and this is also expressed in lowering expectations. So maybe that's why - that's why the companies' managements feel that expectations can be met.

At the same time, the lowering of expectations in the analyst reports also decreased compared to previous quarters. The reason is the confidence shown by the managements, compared to the situation in the past. And so, despite the slowdown-recession, stocks have risen in recent months. The S&P is up 14% in the three and a half months since the October trough.

Rising Interest Rates

The biggest risk of the stock market is the interest rate, not the profits of the companies. The interest rate, economists say, may reach 6% and this will already make the bonds much more attractive than the stocks. Therefore, even the drop in the company's profits, their efficiency, and the relative confidence of management and analysts in future performance, cannot withstand a 6% return on the bonds.

All this without reference to the consequences of another interest rate increase and the expected decrease in demand and the impact on debt profits. Even before this negative effect, a rise in interest rates will produce a dramatic negative sentiment in the stock market.

Please note that the article should not be considered as investment advice or marketing, and it does not take into account the personal data and requirements of any individual. It is not a substitute for the reader's own judgment, and it should not be considered as advice or recommendation for buying or selling any securities or financial products.

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