By Tim Courtney, Chief Investment Officer
The market’s valuation today remains above average, with the S&P 500’s forward 12-month price-to-earnings (PE) ratio at 19.8 compared to the five-year average of 18.6 and the 10-year average of 16.7.1 There are reasons for this, such as record profits and profit margins. As we wrap up fourth quarter earnings season, companies again are reporting strong profits.
With higher valuations though come higher expectations. Market volatility has been elevated in 2022 as the market factors in slowing growth following a strong 2021 and rising interest rates.
However, there are still several tailwinds that should help support drive growth this year:
We think we should see positive growth in 2022, albeit not at 2021’s level. In addition, we think that growth will come alongside higher volatility and uncertainty as the economy decelerates. As always there are risks: the U.S. could be tipped into recession if consumers begin feeling pinched, geopolitical risks become realized or interest rate increases begin to take a toll.5
With this unique environment we find ourselves in (high inflation, high growth, low rates, and labor markets and supply chains in complete flux), we continue to avoid concentrating our portfolios in certain sectors as it remains unclear how all of these pieces will resolve themselves. We will have an update on these areas in the next several months.
The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities. There is over USD 9.9 trillion indexed or benchmarked to the index, with indexed assets comprising approximately USD 3.4 trillion of this total. The index includes 500 leading companies and covers approximately 80% of available market capitalization.
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