Economy, Q4 earnings eye the proverbial 'half-full' glass

·Editor focused on markets and the economy
·3 min read

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Tuesday, January 11, 2021

2022 is likely to be good, just not as great as 2021

Fourth quarter earnings season is about to kick off, and perhaps not a moment too soon. The sentiment that carried the markets aloft on gossamer wings of optimism — or was that Santa Claus? — has now given way to volatility.

On Tuesday, the S&P 500 Index (^GSPC) closed out its fifth consecutive day of losses. Meanwhile, technology stocks are sustaining the brunt of investor worries about higher interest rates, and how well the Federal Reserve will execute its pirouette from crisis-era policy toward fighting inflation.

Analysts at U.S. Bank wrote on Monday that the firm was maintaining a “glass half-full” outlook for stocks, but with whipsaw price action driven by Fed policy, economic uncertainty, inflation and ongoing worker shortages.

“We believe returns will be favorable in 2022, albeit subdued from robust 2020 and 2021 levels as market valuation becomes of increased focus,” the bank said.

With Omicron-driven COVID-19 infections still casting a pall over the global economy (which was at least partly a factor behind December’s lackluster payrolls growth), investors could desperately use a narrative shift that a solid Q4 earnings season may bring.

“We expect another good earnings season overall in which companies continue to beat expectations in aggregate and produce solid growth,” noted Jeff Buchbinder, chief equity strategist for LPL Financial.

With Q4 earnings on tap, Wall Street may have a high bar to cross as COVID-related tailwinds lose steam
With Q4 earnings on tap, Wall Street may have a high bar to cross as COVID-related tailwinds lose steam

Currently, consensus estimates see 22% earnings growth in S&P 500 companies, and perhaps higher given the market’s history of upside surprises, Buchbinder added.

“Earnings growth approaching 30%, though slower than the third quarter’s nearly 40% clip, would be impressive given the challenging operating environment,” the analyst said.

Indeed, the “challenging environment” created by COVID, supply bottlenecks and labor shortages makes upside surprises far from guaranteed. And as Yahoo Finance’s Brian Sozzi reported on Monday, a market that’s become “massively overvalued” is vulnerable to bad news.

With all that’s going on, it’s more than likely that Q4 earnings will have a high bar to clear when compared to the comparable year ago quarter. During that time, fiscal and monetary stimulus was still juicing the economy, inflation wasn’t yet stalking consumers, and supply chains were still relatively well stocked.

Corporate America, in addition to consumers, are confronting growth that’s bound to lose momentum, especially as the Fed gears up to hike rates in the face of surging inflation. The rocky start to 2022 suggests investors are struggling to calibrate the resiliency and relentless upside surprises of 2021 against a new year filled with potential landmines, and not just the ones stemming from the pandemic.

The retrenchment in stocks have helped lower frothy price/earnings multiples, noted Katie Nixon, CIO of Northern Trust Wealth Management, in an analysis last week.

But “lowering does not mean low, however, and we still have P/E multiples higher than historical averages — and we anticipate that we could see those valuations contract further in 2022 as investors begin to price in a more normalized outlook,” Nixon added.

“With a high single-digit outlook for global earnings, and anticipating modestly lower valuations, investors can expect a mid-single-digit price return for global equities in 2022,” she wrote.

By Javier E. David, editor at Yahoo Finance. Follow him at @Teflongeek

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