Mohamed El-Erian says the stock sell-off is in a new phase, as investors add earnings and growth fears to Fed worries

• Mohamed El-Erian said the plummet in US stocks Wednesday marks a new phase in this year's brutal sell-off.
• The economist said earnings and growth concerns were being added to fears around Fed interest-rate hikes.

Mohamed El-Erian believes Wednesday's plunge in US stocks marks a new phase in this year's sell-off, driven by earnings and growth fears alongside existing worries about Federal Reserve policy.

Investors have been grappling with concerns that the Fed's aggressive plan for interest-rate hikes risks tipping the US economy into recession. The Ukraine war and China's COVID-zero policy have intensified the uncertainty, and stocks have fallen sharply.

This year so far, the Dow Jones is down 14%, the S&P 500 is more than 17% lower, and the tech-heavy Nasdaq has slid 26%.

The pain continued Wednesday, when the S&P 500 logged its biggest one-day fall since the height of the pandemic in July 2020, with a drop of 4.04%. The Dow Jones tumbled 3.57%, and the Nasdaq sank 4.57%.

The losses came after retailer Target missed its first-quarter earnings targets, saying surging input costs for fuel and freight hurt its profits.

"Analytically, think of today's equity losses as a new phase and not just a continuation of the earlier selloff," El-Erian tweeted on Wednesday.

"At first, it was about rising interest rates and tightening financial conditions. Now it's also about growth/earnings worries as inflation erodes living standards/profits."

Other moves in the financial markets backed up this view, the economist noted.

"Consistent with the view it's a new (growth/earnings-driven) selloff phase: bond prices rose, opposite to what happened during the prior declines driven by interest rate/financial condition concerns."

Target's stock price dropped about 25% after its earnings update, which followed a disappointing quarterly report from retailer Walmart on Tuesday. Both said poor-selling inventory weighed on profits.

Lowe's and Home Depot also slid after financial updates, prompting some analysts to say the earnings misses by retailers was a sign a recession is more likely.

The US is experiencing record inflation at 40-year highs, lifted in part by global supply-chain blockages, and elevated energy and commodity prices from the war in Ukraine.

"The current inflation is, in too many ways, like watch(ing) a tragedy/horror film with one qualification: Too much of it was predictable, and some of it was avoidable," El-Erian tweeted.

The Fed raised interest rates by 50 basis points in May, the biggest increase at one meeting in 22 years. Its tightening efforts are seen as prompting volatility in financial markets and sparked concerns about a US recession.

But El-Erian has consistently called out the central bank's policymakers for being too slow to act on inflation and not being aggressive enough earlier.

Wells Fargo CEO Charlie Scharf warned a recession would be hard to avoid. Meanwhile., billionaire investor Scott Minerd said there's a possibility of the Nasdaq Composite plunging 75% from last year's peak, and the S&P 500 dropping 45% from its top, in the coming months as the Fed tightens policy.

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