Evergrande default

Sell in October, Rally is over!

Nasdaq takes a 1999 perspective.

As October is approaching, many institutional investors are getting nervous and change their equity outlook to a more defensive stance. The fundamentals of the stock market look extremely shaky and vulnerable to the recent spikes in yields.

Though many institutions don't see any imminent danger to stock markets as of today, many Wall Street banks are getting cautious on wether this year rally is set to go on. As institutional investors expect the third quarter earnings season to disappoint, a clear consensus has emerged on what the coming months might have in store for stocks — muted forecasts on higher interest rates and spiking energy prices. And we are still drifting in the unknown territory around Evergrande drama.

Investors are struggling with forecasting the earnings outlook for 2022 in general. The positioning in U.S. stock took a big hit last week triggering the potential unwinding in overbought markets.

Market players are cautioning each other to prepare for potentially more muted returns in the market in the months ahead. This earnings seasons will be pivotal especially for tech stocks getting brutally smashed under the inflationary pressure.

October will prove that supply chain issues are no longer manageable for tech giants anymore turning them into broader issues not only for tech stocks but for the whole equity market.

Industrial and materials sectors set to join the techs on issuing higher inflation warnings resulting in slippage in their forward earnings guidance: the sentiment is literally tumbling with every hour, and traders see no absolute bottom yet: the upside reward versus downside potential seems skewed toward taking cautious stance impacting the stocks to catch down with... the Chinese ADRs.

Investors are starting to figure out only today the seriousness of the uncontrollable inflation and global supply chain issues. Technically, fund managers expect some more pain coming on the earnings side, despite the improving COVID situation.

But not everything is that bad: as the 10-year yield keeps on growing up, it will be creating attractive valuations in the earnings of the financial sector, which are isolated from the supply chain issue. Nevertheless, if the 10-year yield keeps spiking up with such gaps like we've seen this and last week, it will only damage the equity markets and rattle people's appetite for taking unnecessary risk.

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