After a surprising year of US stock market analysis, investors wonder how much gas is left by Reuters

Author: Lewis Krauskopf

NEW YORK (Reuters) – The US stock market is expected to yield three per cent of annual earnings, but the chances of a similar return in 2022 could be jeopardized by a more malicious Federal Reserve, slowing profit growth and a relentless pandemic.

With just over a week to go until the end of 2018, it is on track to reach an 87% increase, the best three-year performance in more than two decades. The benchmark index has grown by 25% so far in 2021 after a double-digit return in the previous two years.

If it’s a history guide, next year’s earnings aren’t as impressive, though inevitably meager.

The S&P 500 has made double-digit profits nine times in three consecutive years since 1928, according to Jessica Rabe, co-founder of DataTrek Research.

In the year following such periods, earnings were lower on average, with an index of 8.4%, compared to an average return of 11.6%, according to DataTrek. In five of those nine years, stocks rose and the other four fell.

“It’s likely to be a coin toss next year,” Rab said in a statement to Reuters. “But the S&P’s performance has been historically asymmetric, with much higher than positive earnings in the fourth year.”

Earlier this month, a survey of Reuters strategists predicted that the S&P 500 2022 would end in 4,910, up 4.5% from Wednesday’s close.

The three interest rate hikes projected by the Fed in 2022 – a more aggressive path than the markets expected a few weeks ago – will be on the minds of investors as they raise bond yields and reduce risky stocks.

But the economic growth that is driving the central bank to raise rates can also help boost stocks.

The S&P 500 returned an average of 7.7% in the Fed’s first year of rate hikes, according to a 13-cycle analysis by Deutsche Bank since 1955.

“We still see a decent environment for equity investors in 2022, even though we don’t expect the kind of gains we’ve seen,” said James Ragan, director of wealth management research at DA Davidson, who expects single figures. Growth for the S&P 500 in 2022.

Ragan prefers sectors that will benefit a strong economy, such as finance, industry and materials, as well as companies that could drive up prices in an inflationary environment.

“We still believe that the GDP growth environment is good, it should allow companies to still grow their profits, but we are concerned about the valuations,” Ragan said.

ARE THE RESULTS STRONG enough?

Rising bond yields, which tend to have higher rates, can put pressure on already extended share valuations, as projected corporate cash flows will be discounted at higher rates in standard stock valuation models.

According to the Refinitiv Datastream, the S&P 500 sells 21 times its 12-month earnings estimate compared to its historical average of 15.5 times.

While strong gains could bolster the stock, the S&P 500’s earnings are expected to grow 8.3% next year, after a nearly 50% rebound in 2021, according to Refinitiv IBES.

“Profit growth and revenue growth should be enough to raise the stock market, but the risk is that they will fail,” said Michael Arone, the company’s chief investment strategist. State Street (NYSE 🙂 Global Advisors.

The earnings picture is also clouded by uncertainties about COVID-19, the Omicron variant https://www.reuters.com/business/healthcare-pharmaceuticals/how-worried-should-we-be-about-omicron-variant-2021. -12-14 is gaining strength around the world. While investors question the US government’s widespread blockade of the virus-related return, consumers may “be more cautious about a new rise in Covid infections”, according to a recent release by Oxford Economics, which predicted consumer spending to rise by 4.3% . Growth of 8.1% this year.

Another wildcard for investors will be the U.S. midterm elections in November, given that Democratic Party President Joe Biden’s weak control of Congress.

It remains to be seen whether the technologies and growth stocks that have led the U.S. market over the past decade may remain strong. For example, these stocks are particularly sensitive to higher returns because their valuations depend on future earnings.

Wider markets can be problematic if stocks grow exponentially. Profits in six companies – Microsoft Corp. (NASDAQ :), Apple Inc. (NASDAQ :), Google parent Alphabet (NASDAQ 🙂 Inc., Nvidia (NASDAQ 🙂 Corp., Tesla (NASDAQ 🙂 Inc. and Meta Platforms Inc., formerly Facebook (NASDAQ 🙂 – took about one A third of the total return of the S&P 500 has closed since Tuesday, 2021, according to Howard Silverblatt, a senior S&P index analyst at the S&P Dow Jones Index.

“Starting to see poor performance in technology and overcoming it in underdeveloped sectors,” said Andre Bakhos, managing director of New Vines Capital LLC in Bernardsville. “Depending on the nature and design of S & Pren, you would probably get a smaller market.”