• US equities continued to fall on Friday after downbeat subscriber guidance from Netflix, whose shares dropped over 20%.
• The S&P 500 dropped another 1.6% towards 4400 after failing to test 4500 earlier in the session.
• The index is now down 5.4% on the week and has broken below its 200DMA for the first time since June 2020.

US equity markets continued to sell off on Friday, as downbeat earnings from tech giant Netflix weighed on sentiment and its competitors. NFLX shares dropped over 20% on Friday after the company on Thursday issued significantly worse than expected guidance for subscriber growth in Q1 2022. That weighed on other high earnings/value ratio stocks (or so-called “growth” stocks) which are concentrated in the tech sector, though also weighed on the market more broadly as well. The S&P 500 dropped 1.5% towards 4400 having failed an attempt to test the 4500 level again earlier in the session. The index is on course to end this week 5.4% lower and roughly 8.5% below the record highs hit at the start of the year above 4800. With the index on Friday breaking below its 200-day moving average (at 4429) for the first time since June 2020, the S&P 500 bears will now be eyeing a test of Q4 2021 lows in the 4300 area.

The Nasdaq 100, meanwhile, dropped another 2.4% to move below the 14.5K level, having long since let go of the 200DMA at just above 15.0K. That means the index is now down more than 7.0% on the week and is now about 13.5% lower versus its November record highs close to 16.8K. The Dow, meanwhile, was down a more modest 1.2% to underneath 34.3K, taking on the week losses to about 4.5%. The comparatively less growth stock weighted Dow is down just over 7.0% from the record highs it hit in the first week of 2022 near 37.0K. The Dow was weighed on Friday by downside in index heavyweight Disney amid fears the company will issue subscriber growth forecasts for Q1 2022 that are equally as bleak as Netflix.

In terms of the S&P 500 GICS sectors, Communication Services (which contains Netflix) was the worst performer dropping 3.5% and was closely followed by the Consumer Discretionary and Materials Sectors down 3.0% and 2.5% each. Amid the risk-off in stock markets, energy prices fell, weighing on the Energy sector which dropped 2.3%, whilst lower US bond yields (as a result of the safe-haven bid) hurt the Financials sector, which dropped 2.2%. Information Technology was down 1.6%, Health Care was down 1.1% and Industrials were down 0.9%. Lower yields helped the Real Estate hold its ground, with the sector down just 0.2% on the day. The classically defensive Utilities and Consumer Staples sectors, meanwhile, were down 0.2% and up 0.1% respectively.

Investors will fear that further underwhelming earnings might spur further broad selling pressure in US equities next week. Apple, Tesla and Microsoft are the biggest names that will be reporting. Otherwise, the Fed meeting on Wednesday will be the most important event, with traders keen to judge the tone of the meeting for signals as to how fast the bank might lift rates in the coming years. Some analysts have noted that if equities continue to aggressively sell-off, this could eventually dissuade Fed policymakers from hiking quite so aggressively, with market drops having forced the Fed’s hand before (think the end of 2018/early 2019). But amid much higher inflation than back then, the “line in the sand” in terms of equity market downside will be larger than in the past. In other words, where a 10% drop in the S&P 500 might have caused concern at the Fed in the past, given current inflation, a drop somewhere closer to 20% or more might be needed to turn heads at the Fed.