Many investors will be happy to see the back of September, as a historically weak month for stocks lived up to its reputation. The Nasdaq Composite tumbled 10.5%, the S & P 500 fell 9.3% while the Dow Jones Industrial Average lost 8.8%. More hawkish comments from key U.S. Federal Reserve officials also reaffirmed the central bank's commitment to fight inflation, even as the economy teeters on the brink of a recession. The Fed's preferred gauge — the personal consumption expenditures price index — showed that inflation accelerated even more than expected in August. With the outlook for fourth-quarter economic growth looking grim , is there more pain ahead for stocks? CNBC Pro combed through the research to find out what Wall Street thinks. Inflation and central bank response Some market watchers believe the direction of the stock market depends on inflation and the response of central banks. "The latest developments underline our view that the conditions are not yet in place for a sustained turn in market sentiment. In our view, such an improvement will require compelling evidence that the threat from inflation is receding, permitting a more dovish twist from central banks," Mark Haefele, chief investment officer at UBS Global Wealth Management, wrote in a Sept. 30 note. He also highlighted the Russia-Ukraine war as a further source of "market volatility, energy insecurity, and downside risks for economic growth." Meanwhile, Bank of America believes a mismatch in investors' expectations and central bank action could deepen market risk. "Risks continue to build while central banks walk the tightrope of inflation and recession risk. As selloffs intensify, markets may soon expect support from [central banks] (as we saw from the Bank of England on Wednesday), potentially setting themselves up for disappointment," Bank of America analysts wrote on Sept. 30. JPMorgan strategist Marko Kolanovic also struck a cautionary tone. While he doubled down on his "above consensus positive" outlook for stocks, he warned on Sept. 30 that "the most recent increase of geopolitical and monetary policy risks puts our 2022 price targets at risk." These targets may not be realized until 2023 or when those risks ease, he added. 'Short-term' trading opportunity While analysts remain largely cautious on the outlook for stocks, Bernstein believes a bounce could be on the cards — and thinks investors should take advantage. "Our Composite Sentiment Indicator (CSI) has just triggered a buy signal. Over the past 22 years, buy signals have been followed by positive 4 week forward global equity market returns over 70% of the time," Bernstein's strategists, led by Mark Diver, said on Sept. 29. "We consider this signal as a potential short term tactical buying opportunity but remain cautious on equities over a medium-term horizon." Diver does not believe that the 2022 bear market is over, however, nor does he say that the multitude of risks currently driving equity valuations lower are fully priced in. "Rather, we are saying that investor sentiment has now reached such negative levels that in the short term (over the next 4 weeks) the probability of global equities making positive returns is greater than generating negative returns at this juncture," he added. Trim down exposure Bank of America's equity analysts believe investors should take advantage of any temporary rally to reduce their equity holdings. "As tempting as it may appear, financial markets do not reflect a full investor capitulation that is typically consistent with market lows. In addition, we find little reason to cheer about the macroeconomic backdrop," the analysts, led by Ajay Singh Kapur, said in a separate note. The outlook for global growth remains grim, Kapur added, with the world "staring at one of the most aggressive tightening episodes in history." "Although the market may nudge higher in the short term given low investor expectations, we think it would be prudent to use any potential bounce to trim down exposure, preserve capital and live to fight another day, instead of adding risk at this point," Kapur added.
