By Sue Chang, MarketWatch

Volatility to keep investors on the edge

"Keep a stiff upper lip" is a phrase often used by Brits to express fortitude and stoicism during times of distress. U.S. investors may need to borrow the cliché next week as uncertainty and volatility are likely to reign in the stock market.

Defying expectations, the U.K. on Thursday voted to leave the European Union (http://blogs.marketwatch.com/thetell/2016/06/23/brexit-latest-results-and-updates-from-the-vote-as-they-happen/)--the first country to do so in the bloc's 59-year history--and sent investors around the world into panic mode (http://www.marketwatch.com/story/how-brexit-horribly-blindsided-investors-in-5-charts-2016-06-24). Both the large-cap and the blue-chip U.S. indexes had their worst session on Friday since Aug. 24 (http://www.marketwatch.com/story/historic-brexit-vote-sends-dow-futures-plunging-650-points-2016-06-24) with the S&P 500 falling 75.91 points, or 3.6%, to close at 2,037.41, while the Dow Jones Industrial Average slumped 611.21 points, or 3.4%, to close at 17,399.86. The Nasdaq Composite Index plummeted 202.06 points, or 4.1%, to finish at 4,707.98, its worst one-day percentage drop since August 2011.

Most expect the weakness to continue, at least in the coming days.

"In an environment of weak corporate earnings growth and lofty valuations, U.S. financial markets are already primed to overreact to external developments," G. Scott Clemons, chief investment strategist for Brown Brothers Harriman's wealth management business, wrote in a blog post. "This is a big external development, and U.S. financial markets--even though not directly exposed to a redefinition of Europe--are likely to experience heightened price volatility for some time to come."

Savita Subramanian, an equity strategist at Bank of America Merrill Lynch, who had been bearish on stocks even ahead of the U.K. referendum, predicted the S&P 500 could drop as much as 6% to 7% based on previous selloffs sparked by external shocks.

The CBOE Market Volatility Index , which gauges the level of fear in the financial markets, skyrocketed 49% to 25.76, notching its biggest one-day percentage gain since Aug. 8, 2011 (http://www.marketwatch.com/story/wall-street-fear-gauge-sees-sharpest-jump-since-aug-24-on-brexit-2016-06-24).

"There are obviously many ripples that will flow from this momentous event," said Douglas Borthwick, managing director of Chapdelaine Foreign Exchange. "One thing we can be certain about, and that is volatility."

But despite the glum mood in the market, analysts are urging calm as the Brexit-sparked instability is expected to recede in time.

"Markets will be down sharply over the next few days. However, the fundamentals have not changed, and markets will recover," Tom Siomades, head of Hartford Funds' Investment Consulting Group, wrote in a note. "The U.S. economy will continue growing slowly. Brexit will not have a meaningful impact on us or push us into recession."

If nothing else, Friday's global bloodbath is likely to push central banks to maintain accommodative policies to boost liquidity. More important, it will dissuade the Federal Reserve from tightening monetary policy until the markets have regained their equilibrium, according to economists.

Ethan Harris, global economist at Bank of America Merrill Lynch, projected the Fed will not raise rates until December and then wait until June 2017 to hike again.

Some, like Siomades, think a rate increase is completely off the table for now.

"The Fed will not move this year. Once Brexit subsides, the U.S. election cycle will kick in, and then the year will be over," he said.

Other than the potential boost from a more dovish Fed, the stock market won't be able to count on much support on the domestic front with corporate earnings still depressed. Second-quarter earnings are forecast to shrink 5.2%, prolonging the earnings decline for a fifth quarter, according to FactSet.

Only 10 S&P 500 companies and one Dow component, Nike Inc. (NKE), are scheduled to release quarterly results next week.

"Investors will need to be patient as [Brexit] winds through the markets--it's going to take more than a week," said Karyn Cavanaugh, market strategist at Voya Investment Management.

(END) Dow Jones Newswires

June 25, 2016 09:55 ET (13:55 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.