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- Stocks are coming off a brutal two-month stretch, and Wall Street is divided on what comes next.
- Fundstrat remains bullish, while JPMorgan has warned the carnage for stocks isn't over.
- Soaring bond yields may just be a near-term headwind for stocks, another strategist said.
The stock market is coming off back-to-back rocky months, and Wall Street is split on what could be coming next for investors.
The S&P 500 has tumbled about 8% since the end of July but is up about 10.9% on the year. On Tuesday, the Dow Jones Industrial Average gave up all the gains it made this year and is trading about 0.46% lower over the last 10 months. The Nasdaq Composite is up more than 17% in 2023, but it's shed more than 6.4% over the last month.
Meanwhile, the CBOE Volatility Index, the market's so-called fear gauge, hit a four-month high on Tuesday.
"October can seem as difficult as September, but historically it transitions into a more hospitable market environment," LPL chief global strategist Quincy Krosby told Insider. "The intense sell off has pushed the market into a deeper oversold condition that also makes valuations more attractive."
The Fed's latest dot plot, which points to a higher-for-longer interest rate regime, exacerbated the downbeat seasonality trends of August and September, and recent comments from central bankers reinforced those views.
Jay Woods, chief global strategist of Freedom Capital Markets, said the potential for one more rate hike could keep investors sidelined but thinks the market is in a normal corrective stage.
Third-quarter earnings reports could calm the market later this month, he told Insider, but 52-week highs possible by year-end are doubtful.
"I think the low will be put in this month. We're in the midst of a washout," Woods said. "What we're seeing is a corrective phase in the markets to adjust to higher rates."
Adding to investors' jitters has been the 10-year US Treasury yield breaching its highest mark since 2007 at 4.80%, and the House of Representatives ousting Kevin McCarthy as speaker.
Yet Gene Goldman, chief investment officer for Cetera Investment Management, told Insider that the spike in yields could be short-lived, making him "cautiously optimistic."
"The economy is slowing down," Goldman said. "So you'll see pressure on long-term yields, which says more opportunity for stocks."
Earnings are expected to grow by double-digits compared to last year, and the macro landscape underpinning markets should improve as indicators like autos, manufacturing, and housing stabilize, he added.
Fundstrat's Tom Lee, one of Wall Street's most prominent bulls, echoed Goldman's sentiment.
"I think investors should remember that the best opportunities to really make money are during periods of fear, whether that's March of 2023 or it was October of 2022," Lee said in a CNBC interview Tuesday. "I'm pretty confident that we're going to have a nice rally into year-end, much higher from where we are now."
Reason for caution
In a Wednesday note, the JPMorgan's Marko Kolanovic backed his view that the sell-off isn't going to end anytime soon, given that the landscape has parallels to 2008.
"Our cautious outlook will likely remain in place as long as interest rates remain deeply restrictive, valuations expensive, and the overhang of geopolitical risks persists," he said. "Since the start of the year, the headwinds for markets are stronger and tailwinds weaker."
The impact of the Fed's interest rates haven't entirely been felt, suggesting more corporate bankruptcies and consumer loan delinquencies, JPMorgan added.
And Jeff Gundlach, the billionaire founder of DoubleLine Capital, said Tuesday that Treasury yields suggest it's time to start worrying about a severe downturn.
"The US Treasury yield curve is de-inverting very rapidly," he wrote in a post on X. That "should put everyone on recession warning, not just recession watch."