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Stock ETFs Test Crucial Area Amid Mounting Worries

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Stock ETFs are back near their lows for the year as a plethora of fears haunt investors. The S&P 500 closed at 4,175 on Tuesday, down 13% from its January highs and equal to its lows from March.

Meanwhile, the Vanguard Information Technology ETF (VGT), a fund that holds large positions in all-important stocks like Apple and Microsoft, closed at $364, a hair below its March lows and down a sizable 22% from its January highs.

Along with persistent inflation and interest rate concerns, investors have had to deal with worries about COVID-related lockdowns in China; Russia cutting off natural gas exports to parts of Europe; and slowing corporate earnings growth.

The cocktail of negative factors caused the stock market to erase its sharp, unexpected gains from March, when at one point, the S&P 500 got to within 3.5% of its highs.

Now the index is back in correction territory, causing investors to wonder if the index will break down to new lows and potentially enter a bear market:

S&P 500

VGT

A drop of 20% or more from the highs is widely regarded as the threshold for a bear market. The S&P 500 would have to fall to around 3,840 to get there. The tech sector, as measured by VGT, is already down more than 20% from its highs, though the threshold is less meaningful for individual sectors and stocks.

Focus Shifts To Earnings

While interest rates will remain critical until the Fed can get a better handle on inflation, the focus on rates lessened slightly this week as yields pulled back from their highs. The U.S. 10-year Treasury yield was last trading at 2.79% versus a high of around 2.95% a week ago.

In the meantime, investors are shifting their attention to earnings. In the first quarter of this year, profits at firms in the S&P 500 were expected to have grown at their slowest pace since the fourth quarter of 2020.

That’s not unexpected, but it’s another head wind stocks have to deal with in an already tough macro environment. If the S&P 500 can avoid falling into a bear market with everything that is working against it, there’s no doubt many investors would consider that an accomplishment.

Already In A Bear

But the broad market is one thing; individual sectors and industries are another. One area where a bear market is already fully in swing is in high growth stocks. The ARK Innovation ETF (ARKK), a poster child for the high growth/high valuation group, hit new lows on Wednesday, down a stunning 68% from its record high last February.

I tweeted this chart on Tuesday comparing ARKK’s collapse to the collapse of the Nasdaq-100 during the dot-com crash. The two charts look eerily similar.

However, unlike during the dot-com crash, the collapse of high growth stocks this time around hasn’t bled into the broader markets.

That could be because the largest growth stocks—the Apples, Microsofts and Amazons of the world—aren’t down all that much. Moreover, their high levels of profitability and moderate valuations (compared with the S&P 500) give them plenty of cushion even when sentiment turns sharply against them, as it has today.

Still, the margin of error for even those stocks is razor thin, as evidenced by the crumbling share price of former darlings like Netflix and Facebook.

(Use our stock finder tool to find an ETF’s allocation to a certain stock.)

A clearer picture of what’s in store for stocks will emerge in the next few weeks as more companies report earnings and we find out whether the S&P 500 can hold this crucial area it finds itself in.

Follow Sumit on Twitter @sumitroy2

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