Equities Q3 2022 Forecast

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Equities Q3 2022 Forecast: Bearish Momentum Remains Amid Rising Recession Risks

Jul 1, 2022 | DailyFX
Justin McQueen, Strategist

Our Q2 forecast for equities had centred around a mentality shift from a “buy the dip bias” to a “sell the rip” with the Federal Reserve and central banks alike in a tightening overdrive to fight inflation pressures. Consequently, with inflation yet to have peaked and the Fed raising interest rates in 75bps increments, the majority of equity markets have fallen into bear market territory, posting one of the worst first half-year returns in history. Using the S&P 500 as a benchmark, at the time of writing the index has fallen over 22% in H1. Only 1962 and 1932 produced worse returns in H1 at -25.7% and -54.1% respectively (Figure 1).

FIGURE 1. S&P 500 H1 RETURNS (1928-2022)

Source: DailyFX, Refinitiv

CAN H2 BE AS BAD AS H1?

Heading into Q3, the bias will remain the same, fade rallies until the Fed pivots away from its extremely hawkish tone. However, with inflation at 8.6% and inflation expectations extremely elevated, a policy put by the Fed is still some distance away. Therefore, momentum will remain with the bears. Keep in mind, as is often the case in bear markets, sharp market rallies are common and get larger the deeper the bear market.

Looking back at the top 10 worst performing H1 returns in the S&P 500 (outside of 2022), H2 has tended to fare better on average as the table below highlights. What’s more, Q3 returns during these years have been pretty good, averaging 7.5%. Using current levels (3800), a 7.5% gain would suggest a move to 4080-4100. Although, should we see recession risks increasingly priced into the market, the S&P 500 risks a move to 3400-3500.

TOP 10 WORST H1 PERFORMANCES IN THE S&P 500

Source: DailyFX, Refinitiv

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Equities Q3 2022 Technical Forecast: Rebound then Lower Again

Jul 3, 2022 | DailyFX
Paul Robinson, Strategist

At one point last quarter the U.S. stock market was off by about 25%, with all losses coming in the first half of the year. Stocks became oversold with sentiment nose-diving, and on that it appears we are in for a bit of a recovery. However, all that is expected is just that – a recovery rally amidst a broad bear market.

S&P 500

The rally could be sharp and bring back a fair amount of optimism before all is said and done. It will be key for S&P 500 futures to hold onto the recent lows at 3639, and if broken it will need to be a short-lived event, if the recovery outlook is to maintain.

On the top-side, a rally could develop towards 4200, but not likely to exceed it by much given the bigger picture bear market outlook. Countertrend moves can be tricky when trying to play momentum, so taking a pullback approach (buy-the-dip) may be the most prudent way to participate.

S&P 500 WEEKLY CHART

Chart created with TradingView

DAX 40

At one point last quarter the German benchmark was holding up much better than its US counterpart, but that outlook quickly changed towards the end of the last leg lower. The DAX is likely to recover, but it could be a bit more sluggish than the US index.

Watch support via the trend-line off the March 2020 low. A firm breakdown below 12965 could have the earlier-year low in play. On the top-side, watch the trend-line off the January peak, and after that resistance clocks in from just over 14700 up to 14925.

DAX 40 WEEKLY CHART

Chart created with TradingView

NIKKEI 225

The Nikkei is also looking like it could be on path to a sluggish move higher despite having generally been stronger than the US market. A bounce could have the 200-day at 27754 (& declining) and trend-line off the 2021 high in play as strong, confluent resistance. This could be a spot to look for the Nikkei to roll over. On the downside the March 2020 trend-line is in the area as support, followed by the yearly low at 24681.

NIKKEI 225 WEEKLY CHART

Chart created with TradingView