By Michael O’Connor

Investors' wounds deepened last week as the S&P 500 fell nearly 3%, declining for the fourth week out of the past five.

The NASDAQ precipitous decline continued into Monday, putting the tech-based index into bear-market territory, as it fell more than 20.0% below a recent high set in November. While this drop may seem alarming, the NASDAQ has compounded at 21% a year for the last five years despite experiencing three bear markets in the past five years.

All is not lost.

To be blunt, the outlook remains very much uncertain. The degree and duration of the war are huge unknowns that can change rapidly and have enormous implications on economic growth, inflation, and interest rates.

With that said, my base case remains the same. The war can subside over the coming months allowing inflation to moderate and sentiment to revert. With strong consumer demand, robust US household balance sheets and money on the sidelines, earnings can remain elevated, and US economic growth can remain positive.

Valuations have also become more compelling at current levels, with the S&P 500’s forward P/E now below its pre-pandemic levels. Undoubtedly multiples can contract further in the short-term if the geopolitical tensions worsen, but I believe a reversal is likely by year-end as the current headwinds subside.

Winners

The dating App Bumble jumped 28.5% last week as the firm's revenue figures grew 25.7% year-over-year.

Despite Bumble experiencing its strongest trading day ever, it still sits 70% below its IPO price. The current inflation-induced growth stock distain will ensure that a quick reversal to previous highs remains unlikely despite last week's success.

Losers

It appears that investors previously boasting the endless potential of every high-growth SaaS company in existence are now cutting all ties and denying any involvement, quickly reclaiming Warren Buffet as their one true leader.

DocuSign tops the bill this week as the poster child of the discarded pandemic darling. Already down 70% from all-time highs, the stock plummeted another 20% following Thursday's less than inspiring earnings call.

In keeping with the theme of the quarter, the company reported solid Q4 results, but weaker guidance sent the stock plummeting. Lower than expected revenue guidance and a predicted annual growth of only 13% for a company that is still pre-earnings brought the growth narrative very much into question.

Outlook

Lower valuation multiples are appealing, but investors are acutely aware of the dangers that lie ahead over the short term. Inflation has surged to a 7.9% annual rate, a number that looks likely to remain elevated as commodity prices rise, while upcoming interest rate hikes represent the potential for a policy misstep by the Fed.

Volatility is likely to remain, but some sectors will absorb the impact better than others. Short duration, long value remains the order of the day with a tilt towards energy, consumer staples and real estate.

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