The Tell: Why the S&P 500 can fall another 11% as the Fed fights inflation: Mizuho Securities

by | Oct 12, 2022 | Stock Market

Scarier days lie ahead for the stock market, according to Mizuho Securities. While the S&P 500 index
SPX,
+0.36%
has fallen about 25% from its peak this year, there’s “more pain to come” for equity-market bulls embarking on a “misguided ‘buy the dip’ strategy,” Mizuho’s team of U.S. economists warned in a Tuesday client note.

Such thinking “ignores the essential difference underlying the post-Covid macro environment and that which existed between 1990 and March 2020 when the Trump administration initiated the lockdown to curb the spread of the virus,” argued Steven Ricchiuto, chief U.S. economist at Mizuho, and economist Alex Pelle. But with inflation running near a 40-year high, the Federal Reserve will keep “chasing the terminal rate that causes the labor market to crack.” That means long-term yields will be “dragged higher” to achieve a sustained pullback in U.S. living costs, but also resulting in increased risk to earnings and real growth, they said. The 10-year Treasury yield
TMUBMUSD10Y,
3.914%
hit 3.938% on Tuesday, its second highest level of 2022, according to Dow Jones Market Data. The benchmark is used for pricing everything from consumer loans to corporate debt. See: Fed’s Mester says there’s been no progress on inflation, so interest rates …

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