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:
- Momentum from 2021 can carry into the new year. The end of 2021 was strong in both earnings and economic growth. Fourth quarter gross domestic product (GDP) is estimated to have increased at a 5.5% rate.2 While returns and growth in 2022 will be lower than last year (earnings which grew at 30% to 50% in 2021 from 2019’s levels are expected to rise by 5% to 10% over last year’s impressive record), they are expected to be positive.3
- Household net-worth remains high. Both the equity and housing markets have seen tremendous growth, pushing household net worth to surge $34.1 trillion since the start of the pandemic, reaching a record $144.7 trillion.4 Much of the pent-up demand seen last year has subsided, meaning there might be less spending in 2022. Nonetheless, spending in January was strong, rising wages are helping offset at least some inflation and households are relatively healthy to facilitate growth.
- Companies aren’t afraid to raise prices. While this isn’t a plus for us as consumers, it is heartening for us as investors. More businesses feel secure enough to raise prices without fear of losing market share or customers. This makes stocks at least a partial hedge against inflation and is helping protect companies’ profit margins.
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.
- FactSet (2/11/22) — S&P 500 earnings season updates: February 11, 2022
- Reuters (1/27/22) — U.S. economy likely regained steam in Q4, 2021 growth seen best in 37 years
- S&P Global (2/15/22) — S&P 500 index earnings and estimate report
- Bloomberg (12/10/21) — The most important number of the week is $34.1 trillion
- USA Today (1/25/22) — Fed faces crucial interest rate decisions, and any missteps could tip economy into recession
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.
|PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE RETURNS. Information and opinions provided herein reflect the views of the author as of the publication date of this article. Such views and opinions are subject to change at any point and without notice. Some of the information provided herein was obtained from third-party sources believed to be reliable but such information is not guaranteed to be accurate. In addition, the links provided within are for convenience only and the provision of the links does not imply any sponsorship, endorsement, or approval of any of the content. We do not guarantee the content or its accuracy and completeness. The content is being provided for informational purposes only, and nothing within is, or is intended to constitute, investment, tax, or legal advice or a recommendation to buy or sell any types of securities or investments. The author has not taken into account the investment objectives, financial situation, or particular needs of any individual investor. Any forward-looking statements or forecasts are based on assumptions only, and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. Any assumptions and projections displayed are estimates, hypothetical in nature, and meant to serve solely as a guideline. No investment decision should be made based solely on any information provided herein and the author is not responsible for the consequences of any decisions or actions taken as a result of information provided in this book. There is a risk of loss from an investment in securities, including the risk of total loss of principal, which an investor will need to be prepared to bear. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular investor’s financial situation or risk tolerance. Exencial Wealth Advisors, LLC (“EWA”) is an investment adviser registered with the Securities & Exchange Commission (SEC). However, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. EWA may only transact business in those states in which it is registered, notice filed, or qualifies for an exemption or exclusion from registration or notice filing requirements. Complete information about our services and fees is contained in our Form ADV Part 2A (Disclosure Brochure), a copy of which can be obtained at www.adviserinfo.sec.gov or by calling us at 888-478-1971|