US stock futures tumbled Monday as the global stock selloff deepened, driven by fears that the Federal Reserve is moving too late to support a slowing economy.
Nasdaq 100 futures fell sharply by 3.3% after the index entered a technical correction on Friday. S&P 500 contracts dropped more than 2.1%. Europe’s Stoxx 600 benchmark declined over 2.2%, marking its largest three-day drop since June 2022.
In Japan, the Topix and Nikkei indexes both plunged over 12%. Taiwan’s benchmark had its worst day on record, while a broader gauge of Asian shares experienced its steepest decline in over four years. The yen surged more than 2.7% against the dollar.
The market rout was in part fueled by data released on Friday showing a weakening US jobs market, which activated a closely watched recession indicator. Investors are also worried about elevated valuations resulting from the AI rally, and rising tensions in the Middle East are exacerbating the risk-off sentiment.
The 10-year Treasury yield dropped five basis points to 3.77%, its lowest point in more than a year. Meanwhile, The two-year yield plunged to 3.81% as traders bet the Fed may have to cut rates more than anticipated in September.
As a result of the sell-off, JPMorgan economists now estimate the odds of a U.S. recession at 50%.
"Now that the Fed looks to be materially behind the curve, we expect a 50bp cut at the September meeting, followed by another 50bp cut in November," JPMorgan economists said.
"Indeed, a case could be made for an inter-meeting easing, especially if the data soften further—although Fed officials might worry about how such a move could be (mis)interpreted."
Analysts comment on the stock market rout
Morgan Stanley: “The real question for equity investors is whether companies can deliver on what is now priced—i.e., accelerating growth in earnings with multiple years of expansion ahead. We remain skeptical on that front as earnings revisions breadth enters a period of seasonal weakness and commentary from many companies suggests there is limited visibility on a 2H reacceleration. This argues for lower equity valuations, which lines up with our base case target multiple of 19x versus the current 20.5x.”
Evercore ISI: “With the soft employment report, the NASDAQ correction, the plunge in bond yields, and the plunge in commodity prices, it’s possible we’re seeing recession signals coming home to roost. In any event, this week, bad news was bad news for the stock market.”
“The decline in the LEI and temp employment, as well as the Sahm Rule, are giving recession signals. That said, there are factors that have been and are still keeping the economy resilient, eg, govt spending, rising real wages, and increasing corporate profits.”
UBS: “Similar to what we witnessed amidst the small cap rotation a few weeks ago, the degree of moves was clearly exacerbated by stretched positioning, in our view. The difference today is there is fundamental backing to elevated levels of risk premia, from both a macro and earnings perspective. But have we gone too far, too fast? Aggressive rate cuts priced into the market post-NFPs and the coincident move in the front-end of the yield curve appears to be an overshooting, per our Rates Strategists. Our US Equity Strategists flagged that VIX > 25 has historically been a buying opportunity for stocks. We echo this sentiment, but note the risks appear to be skewed more asymmetrically to the downside.”
BTIG: “It's been a long time coming, but the fulcrum from markets trading 'bad news is good' to 'bad is bad' appears to be here. Therefore, lower rates are likely to be met with lower stock prices, as we have seen over the last couple of days. As far as the SPX goes, the recent pullback gets us closer to a possible washout, but we still see some risk towards 5200. Internals have weakened, but given the rotation into defensives, they remain far from what we typically see at tradable lows.”
Nomura: “If we are indeed correct with our baseline views, then this pullback in stocks would eventually prove to be yet another buying opportunity assuming the “Fed put” is in place. Indeed, our US economists are now looking for three rate cuts of 25bp each and view these Fed cuts as “pre-emptive easing”. However, alternatively, if we are proven wrong and in the hindsight, peak AI was likely behind us as current analyst projections prove to be wildly misguided and/or the US economy does go into a recession (even though a mild one) – then a more long-lasting disruptive period for stocks is likely ahead of us.”