Wall St Week Ahead Inflation data is the next priority for investors after soaring bond yields

US Federal Reserve Chairman Jerome Powell addresses an online-only press conference in a screenshot from US Federal Reserve video broadcast from the Federal Reserve Building in Washington, US , January 26, 2022. US Federal Reserve Board/Handout via REUTERS

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NEW YORK, Feb 4 (Reuters) – Sharp swings in stocks and a sharp rise in government bond yields shine the spotlight on next week’s U.S. inflation data as investors brace for greater asset volatility.

A turbulent week in markets ended with Treasury yields soaring to their highest level in more than two years after surprisingly strong US jobs data fueled expectations of a Federal Reserve more belligerent.

Strong inflation data – which hit its highest annual level in nearly four decades in December – could further strengthen the case for a more aggressive Fed and prolong the rise in yields, dampening the attractiveness of a stock market struggling to rebound from last month’s tumble.

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The U.S. consumer price index for January is expected to have risen 0.5%, culminating in an annual rise of 7.3%, which would be the largest such increase since 1982, according to a Reuters poll.

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

The yield on the benchmark 10-year U.S. Treasury, which moves inversely to prices, has climbed around 40 basis points in 2022 to more than 1.9%, as investors factor in at least five rate hikes from the Fed this year.

The rise has weighed on stocks overall while contributing to sharp declines in the stocks of many technology and growth stocks, whose valuations are based on future earnings that are discounted more heavily as bond yields rise. The benchmark S&P 500 (.SPX) is down around 5.6% so far to start the year, with the tech-heavy Nasdaq (.IXIC) seeing a nearly 10% decline .

“The reason people are hitting the reset button… is that valuations have come up a lot,” said King Lip, chief strategist at Baker Avenue Asset Management. “With rates rising, valuations just can’t be justified. So anytime there’s a little shortfall (on earnings) that’s when those stocks get a little punished.”

According to Refinitiv Datastream.

Some investors believe that stocks need to drop further before they become attractive. Morgan Stanley analysts on Friday urged clients to sell in stock market rallies as “a Fed tightening historically leads to lower returns and high uncertainty for equities” and wrote that the fair value of the S&P 500 is closer to 4,000. The benchmark index rose about 0.5% on Friday to 4,500.

Others wonder if the growth stocks that have driven markets higher for years are ceding leadership to so-called value stocks, relatively cheap stocks that should perform better in an environment of rising rates or falling. inflation.

The S&P 500 Value Index (.IVX), filled with stocks of energy companies, financial firms and other economically sensitive names, was down 1.4% so far this year on Thursday, against a 10.2% decline for its growth peer S&P 500 (.IGX). That disparity would be close to the largest annual outperformance of value over growth in two decades.

“You’re seeing a gradual rise in market interest rates causing investors to reevaluate and look at short-term profitability as well as value and cyclical trading,” said John Lynch, chief investment officer of Comerica Wealth Management.

The market was also digesting a topsy-turvy week of high-profile earnings. Shares of Google parent Alphabet Inc (GOOGL.O) and Amazon.com Inc soared after their respective quarterly reports, while megacap peer Meta Platforms Inc (FB.O) fell after the grim predictions of the owner of Facebook.

Next week, reports are expected from Walt Disney Co (DIS.N), Coca-Cola (KO.N) and Twitter Inc (TWTR.N), with Nvidia Corp (NVDA.O) due to report the following week.

As with meta-platforms, any disappointment in reports — especially from companies whose valuations remain expensive — could spell serious market fallout, investors said.

“It’s been a volatile start to the year, with investors oscillating between concerns about Federal Reserve tightening and confidence in the economic recovery,” Art Hogan, chief market strategist at National Securities, said in a note. research. “Meta aside, a strong earnings outlook is helping to ease uncertainty, at least for now.”

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Reporting by Lewis Krauskopf in New York Additional reporting by Gertrude Chavez-Dreyfuss in New York and Lucia Mutikani in Washington Editing by Ira Iosebashvili and Matthew Lewis

Our standards: The Thomson Reuters Trust Principles.

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