Mitch’s Market Outlook for 2022
Isa G. from Plano, TX asks: Happy New Year, Mitch! My question is pretty simple and straightforward, just curious if you have some thoughts on the outlook for 2022. What can investors expect, look for, etc.? Hope you had a wonderful holiday season!
Thank you for writing, and Happy New Year!
In looking ahead to 2022, investors should focus on the same fundamental factors that I’d recommend analyzing every year – earnings, interest rates, inflation, and economic growth. Across each of these factors, I see mostly moderating forces in the United States, what I might term a ‘normalization’ of economic fundamentals.
On the earnings front – which long-time readers know I consider to be the most important factor for stock market returns – I think corporate earnings will remain strong in response to the tight labor market, rising wages, and pent-up consumer demand for services. The pandemic shifted spending a great deal towards goods and away from services, and I think we could see a pendulum swing in the other direction as pandemic risk fades.1
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That being said, comparisons in 2022 will be tougher given that 2021 was a considerably strong year for U.S. corporations across the board. So, I’d expect moderating earnings growth rates and moderating earnings surprises, which could ultimately mean more modest stock market returns (though still positive, in my view). The chart below looks at forward-looking quarterly estimates for S&P 500 companies, which you can see leveling off:
Inflation is another factor I think will see some moderating forces in 2022. Rising prices were obviously the big story in 2021, due to imbalances caused by supply chain issues being met with robust consumer demand. Comparisons to 2021 also made the inflation numbers look very big. In my view, consumer demand for goods should moderate as supply chain issues become increasingly resolved, and should take some pressure off of rising prices. A lack of additional fiscal stimulus should help, too.
We know today based on late 2021 Federal Reserve meetings that interest rate hikes are planned for 2022, but in my view, we should not see interest rates rise to the point that the equity risk premium (which values stocks relative to the 10-year U.S. Treasury) makes stocks unattractive. I think the 10-year U.S. Treasury would need to rise to about 3% in order to compete with stocks on a risk/reward basis, and I do not see that happening in 2022.
Bottom line – I think 2022 will be a positive growth year for the U.S. economy and for corporate earnings, but tough comparisons with 2021 and moderating forces will make some of the positive surprises more challenging to come by. That does not mean stocks will suffer, but I do think it means investors will be challenged to identify individual stocks poised to deliver better-than-expected earnings.
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2 ZIM may amend or rescind the guide “How to Build Your Ultimate Retirement Portfolio” for any reason and at ZIM’s discretion.
3 Zacks investment Research, Dec 15, 2021. https://www.zacks.com/commentary/1839842/making-sense-of-evolving-earnings-estimates
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