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Here’s what just happened that triggers stock market drops 71% of the time, warns Credit Suisse

Wall Street’s in an unusually bullish mood Tuesday morning.

Tim Holland, chief investment officer at Orion Advisor Solutions, argues the market has just notched two peaks. Last week, the Labor Department finally reported an ever-so-slight decline in inflation, as a measure of individual investor sentiment showed the greatest percent of individual investors that were bearish since 2009.

“If we have seen peak inflation and peak investor pessimism the path forward for the market should be much more constructive,” said Holland.

Not everyone’s convinced. Credit Suisse’s London-based global strategy team have been cautious on stocks since February — and they still are. They say recession risk remains very high and there isn’t upside on their fair value models. Importantly, the risk to corporate earnings remains high.

“Earnings revisions have started to fall and 71% of the time when this happens, markets fall over the next quarter. Current PMIs imply significant further downside to revisions. We see clear risk of negative EPS in 2023,” said strategists led by Andrew Garthwaite.

Sure, markets have bottomed after a roughly 19.5% drop from their peak — the intraday low on the S&P 500

that was reached last Thursday — but on three of those four occasions, the Fed was easing.

For the Credit Suisse team to turn bullish, it would take, more or less, clear signs that Fed hikes are restraining the economy.

“What do we need to see to be more constructive? Clear signs of U.S. wage growth slowing, U.S. lead indicators falling sharply indicating that the Fed needs to do less to get unemployment rising above full employment, signs of a new paradigm showing that margins can stay high even as nominal GDP slows by [8 percentage points], clear cut undervaluation on [equity risk premium] model, or credit spreads discounting a recession,” Garthwaite and the team said.

The buzz

Hong Kong-listed stocks including

and NetEase

surged as Shanghai set plans to reopen from its strict lockdown, including a full reopening by June 1.

Elon Musk — over Twitter, of course — said that his offer for the social-media service

cannot move forward until the company provides more details on the proportion of spam accounts. CEO Parag Agrawal says he’s confident that spam accounts represent less than 5% of the user base, and the company said it was “committed to completing” the $54.20-a-share deal in a proxy statement. Separately, Musk may be selling shares in SpaceX to help fund the bid, the New York Post reported.

It’s a big day on the retail front, as Home Depot

reported a surprise rise in same-store sales growth, but Walmart

shares are getting hit by an earnings miss and outlook cut. The April retail sales report showed a 0.9% boost. Industrial production and a homebuilder sentiment report also are due for release.

Federal Reserve Chair Jerome Powell is due at 2 p.m. Eastern to appear at The Wall Street Journal’s Future of Everything Festival. A slew of regional Fed presidents, from the hawkish James Bullard to the dovish Neel Kashkari, also are due to speak.

See interviews with Powell, the CEOs of companies including Wells Fargo, Moderna and FanDuel. Register for virtual access to The Wall Street Journal’s Future of Everything Festival, May 17-19. (Select virtual pass for complimentary access.)

A wave of 13-F reports from top shareholders were filed at the Securities and Exchange Commission. Berkshire Hathaway revealed new stakes in Citigroup
Paramount Global

and Celanese
among others. Chase Coleman’s Tiger Global Management, which has struggled this year, boosted stakes in several tech plays including CrowdStrike Holdings

and Carvana

The markets

Markets seem to be flying higher, as U.S. stock futures


rose and the dollar


Top tickers

Here were the most active stock-market tickers as of 6 a.m. Eastern.


Security name






AMC Entertainment








Mullen Automotive






The chart

Correlation doesn’t mean causation, and dual Y-axis charts can be manipulated to show closer correlations. So with all those caveats in mind, U.S. economists at Natixis point the close correlation between mortgage rates and house prices, which points to a perhaps sharp wealth effect risk.

They do point out, however, that the steepness of the home price slowdown might not be as sharp as the chart would suggest, owing to the national housing deficit of both the pandemic housing boom and ongoing supply chain issues. A mid single digit correction in house prices over the next year “is entirely reasonable.”

Random reads

The U.S. military is throwing around $50,000 bonuses to recruits, because of the rising pay at companies like Target and Starbucks.

How Shanghai residents have employed Excel to navigate the lockdown.

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