Earnings season continues this week, but the confluence of global pressures, rising rate concerns, and new fears around a potential lockdown in Beijing in response to Omicron infections plays heavy on domestic markets and sentiment. This environment is seeing investors increasingly moving to a risk-off posture across all fronts as cash and cash-like assets gain in popularity, reports the Wall Street Journal.

The S&P 500 rallied initially last week, but a sell-off in the latter half of the week saw the index lose more than 4% within two sessions. As bonds and equities both underperform and markets continue to remain frothy, investors are seeking quality, with Treasuries rallying and commodities and crypto both falling, explains Mark Hackett, chief of investment research for Nationwide’s Investment Management Group, in a Nationwide blog.

“Though we’ve seen weak sentiment for the first several months of 2022, we’re now seeing weak equity flows, which is a notable but likely a short-term challenge. In this environment, investors should pay attention to the fundamentals, which are showing resilience,” Hackett writes.

The weakness in investor sentiment is impacting equity flows, which are experiencing some of the worst outflows since the onset of the pandemic in 2020 with a loss of $35 billion in just two weeks. Put/call ratios have seen a massive uptick as investors seek protection in such a challenging market environment.

“The AAII recently fell to a 30-year low, and the Bank of America Bull & Bear indicator has fallen to a contrarian ‘buy’ signal. Extremes in sentiment and flows have historically been seen at inflection points for the market, as extremes often lead to market reversals,” explains Hackett.

Earnings Season and Global Impacts

The negative sentiment is impacting earnings season, with many companies that have reported positive earnings (80% have reported above-estimate earnings) for the first quarter of 2022 not seeing a subsequent increase in their stock prices. Commentary coming from companies that have reported has been mixed, citing increased services spending and a strong macro backdrop going up against the pressures of a strengthening dollar and input cost pressures.

“Investor fears this year have shifted from the Omicron variant to the Fed and inflation to Russia/Ukraine, and now to the lockdowns in China, as the lockdown in Shanghai enters the fourth week,” writes Hackett.

Fears of a potential lockdown in Beijing due to Omicron infections while the Shanghai lockdown is still ongoing have sent China-related stocks and funds spiraling and have impacted broader markets, from oil prices to commodities. Add onto that the concerns of a half-point interest increase by the Fed after remarks from Chairman Powell last week that showed a clear preference for frontloading aggressive hikes, and it’s created a continuing turbulent time for markets.

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