The Stock Market Just Suffered Its Worst Week Since 2020. Here’s What Comes Next

A rough beginning to 2022 just became a lot worse.

This week, the Dow Jones Industrial Average fell 1646.44 points or 4.6%. That looked impressive compared to the S&P 500, which sank 5.7%, and the Nasdaq Composite, which fell 7.6% and is currently down 14% from its record highs, set in November. Each of the three had its worst weeks since 2020.

The droplets make an odd sort of logic. Last year's increases were powered by a mix of the Fed's easing monetary policies, substantial federal government subsidies, and surging corporate profitability. Incomes should remain strong—corporate earnings are on track to increase by 24% in the fourth quarter, according to Refinitiv info—funds are no longer pouring out of Washington, and the Fed is prepared to hike interest rates. In light of this, the market's falls seem understandable. "It's a sensible reaction to the climate," explains Dave Donabedian, chief investment officer at CIBC Private Wealth US.

Although rational, the loss has been unpleasant for investors who have been taught to trade on the dips. This week, the Nasdaq Composite saw two straight one-percentage-point gains, which converted into losses by the end of the trading day. Thursday's reversal was a very uncommon thing. The Nasdaq 100 was up 2% before having to give up its profits and ended down 1.3%, just the seventh time in the last ten years that a gain of 1.5% or more has resulted in a loss of 1%.

According to Susquehanna Financial Group analyst Christopher Jacobson, the index was higher one week later on five of six occasions. "Those earlier actions might give some relief to those seeking signals of hope," he adds. The unfortunate thing is that the sample size is extremely small.

It's difficult to remain positive when Nasdaq's highest-flying firms continue to disappoint investors. However, the greatest surprises came from Peloton Interactive (PTON) and Netflix (NFLX). Peloton's stock dropped 14% this week when it was revealed that it would be ceasing manufacturing in February and March. Peloton rejected the closure intentions but said it needed to right-size its company due to decreasing demand for its cycles and treadmills. Similarly, Netflix fell 24% after telling investors that it is projected to attract just 2.5 million customers in the first quarter of 2022, much short of the 5.7 million predicted. It leaves you wondering what the following week will bring when companies like Apple (AAPL) and Tesla (TSLA) publish their reports.

According to Wolfe Research analyst Chris Senyek, the dot-com bubble collapsed in 2000 due to a combo of the Federal Reserve tightening and some significant earnings disappointments. That isn't his basic scenario, but with the Fed tightening once more and high expectations for technology expenditure, it wouldn't take much for a recurrence. "We anticipate the entire market and technology firms to provide robust mid- to high-single-digit EPS beats, which should help sentiment," Senyek says. "But, if we're incorrect, there might be a lot more bad news coming."

According to Evercore ISI analyst Julian Emanuel, the days of tech earnings growth seem to be coming to an end. With the economy expanding rapidly, inflation increasing rapidly, and rising interest rates on the horizon, value stocks may be poised to pounce after 15 years of underperformance. "People are only coming to terms with it," Emanuel adds. "It's producing further market volatility."