Investors will be surprised in the Q3 earnings season how painful the current environment is for businesses. Bed, Bath and Beyond lowered their outlook yesterday, and Nike and FedEx both warned of margin pressures last week. This will become the big theme when Q3 earnings releases start coming out in two weeks’ time.
Short-term risk will be dictated by the marginal cost of energy and if the energy crunch gets worse it will force equities lower. We could see a correction of 15% in equities. Key to watch are interest rates, energy prices, the USD, and curvature of the VIX futures curve. The fact that we are 80% higher in global equities since the bottom will make many investors quick to realize some of their gains as the return is beyond what you would expect over many years.