The Stock Market’s Biggest Risk Isn’t the Fed. It’s Earnings.

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Let’s call it a dress rehearsal for the funeral.

We’re referring to the drubbing that tech stocks took this past week. On the surface, it wasn’t all that bad. The

Nasdaq Composite
fell 0.3%, better than the

Dow Jones Industrial Average’s
0.9% drop and on par with the

S&P 500’s
0.3% decline.

Yet the pain for the most-expensive speculative names continued. The

iShares Expanded Tech-Software Sector
exchange-traded fund (ticker: IGV), which counts

Salesforce.com

(CRM) and

Oracle

(ORCL) among its biggest holdings, slid 1.6% this past week, and

Peloton Interactive

(PTON), once the face of the forward-thinking pandemic beneficiaries, fell 12% and lost its spot in the Nasdaq 100.

By now, we all know what’s to blame for the slide in these tech stocks. With inflation soaring—December’s consumer price index rose 7% year over year—the Federal Reserve has orchestrated a massive shift in monetary policy. The federal-funds futures market is pricing in an 86% chance of a hike at March’s meeting, according to the CME FedWatch Tool, with at least two, if not three, more coming over the rest of the year. That’s bad news for speculative growth stocks, which are hit hardest by higher interest rates.

Yet if rate expectations have peaked for now, it could mean that tech stocks will look attractive once again, if only until investors are forced to readjust to tighter monetary policy again. “What we are likely to see is increased bottom fishing in tech in the next few days as it is unlikely the path of rates will increase much more in the coming weeks,” writes Nordea strategist Sebastien Galy. “[The recent selloff] is just a preview of what will happen to tech in a year’s time.”

That’s a long way off, and now investors have earnings season to distract them, at least until the Federal Open Market Committee meeting ends on Jan. 26. It didn’t get off to a great start.

JPMorgan Chase

(JPM) sank 6.1% on Friday, despite beating earnings forecasts after it called out rising expenses, suggesting that perhaps too much good news had been priced into stocks.

It’s a possibility. December’s retail sales data, released on Friday, declined 1.9% in December, missing forecasts for a 0.1% decline. It may be nothing—a temporary decline caused by the Omicron variant and early holiday shopping. But it also suggests that the fourth quarter fizzled out, which could have an impact on earnings, says Tracie McMillion, head of global asset allocation at Wells Fargo Investment Institute.

“Growth might have been a little slower at the back end of 2021, so earnings are probably going to come in a little lighter than they otherwise would have,” she says.

Investors better hope earnings hold up. While the threat of Fed rate hikes—and the rising bond yields that accompany of them—may be concerning, a disappointing earnings season could be a bigger problem for the global stock market, writes Tim Hayes, chief global investment strategist at Ned Davis Research. “[A] broadly disappointing earnings season could lead to a degree of breadth deterioration and selling persistence that has not been triggered by the bond yield rise,” he explains.

Let’s hope it doesn’t come to that.

Write to Ben Levisohn at Ben.Levisohn@barrons.com