Wall Street and Bay Street Post Quarterly Losses, with More Pain Ahead

Wall Street and Bay Street both ended 2021 at record levels and even extended those gains in the opening days of 2022. It’s been all downhill since then. Wall Street just reported its third straight quarterly loss while the TSX closed out its second consecutive quarterly loss as rising inflation and a looming global recession weighed on stocks.

Over the first nine months of 2022, U.S. stocks recorded three quarterly declines, the longest slump for the Nasdaq and S&P 500 since 2008 and the Dow Jones Industrial Average’s longest losing streak in seven years. All three indexes exited the third quarter in bear markets, with the S&P 500 down 25%, the Nasdaq off by 31%, and the Dow Jones retracting 20%.

The TSX faired better than its American counterparts, but barely. The TSX marked its second negative quarter in a row, with the index losing 15.7% of its value since the end of March. The TSX eked out a 2.6% gain in the first quarter.

When Will the Stock Market Rebound?

Stocks have been under severe pressure since the U.S. Federal Reserve began its most drastic series of interest rate hikes in decades in an effort to tame runaway inflation. Not to be outdone, the Bank of Canada has announced its most aggressive interest-rate hike cycle ever. Other central banks around the world are following suit and it’s expected to push the global economy into a recession.

Despite the gloomy outlook stocks actually entered the fourth quarter on a bullish note, with the S&P 500 jumping 5.7% in the first two days of October. It was the best start to a quarter since the second quarter of 1938. The TSX made equally impressive gains, climbing 4.2% over the opening two days.

Initially investors were optimistic that cracks were beginning to appear in the U.S. economy and that inflation may have peaked. But after the biggest two-day surge since 2020, stocks retreated and oil prices rallied on word that Russia and OPEC+ were cutting their output by two million barrels per day.

While investors may have hoped that stocks have bottomed, with Jim Cramer even going so far as to say the markets will bottom near the end of October and experience a “powerful” rally, it appears more pain is ahead.

What’s the Outlook for Third Quarter Earnings Season?

The U.S. is in a technical recession, having marked two consecutive quarters of declines in gross domestic product (GDP). Inflation is still untenably high and interest rates are still going up which suggest third quarter GDP will also experience a retraction.

This has caused analysts to cut third quarter bottoms-up earnings per share (EPS) estimates (an aggregate of the median EPS estimates for all S&P 500 companies) by the largest amount in more than two years—by 6.6% to $55.51 from $59.44. Analysts have also decreased their EPS estimates for the fourth quarter, down 4.5% to $58.01 from $60.73.

It certainly doesn’t appear as though the stock market has bottomed yet.

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