US corporate earnings growth is expected to slow next year after a highly successful 2021, with rising inflation and a variant of COVID-19 spreading rapidly, adding to uncertainty as the Investors try to justify stock prices trading near their all-time highs.
The S&P 500 It is on track to rise about 24% this year, and the index’s price-earnings ratio is well above its long-term average, raising concerns that the market is overbought.
S&P 500 earnings are forecast at 8% in 2022, following an estimated 50% rise this year, as companies rebounded from closures and recession in the early phases of the pandemic, according to IBES data from Refinitiv.
Consensus estimates of Wall Street by 2022 they have barely changed in recent weeks, even as stock indices have lost ground amid concerns about how quickly the omicron variant is spreading.
“We are entering an environment where we are likely to go from seeing multiple expansion to multiple compression“, He said Robert Phipps, director of Per Stirling Capital Management in Austin, Texas, referring to a company’s profits rise, but its stock price doesn’t follow the same path, leaving investors with little reward.
The S&P 500’s forward price-to-earnings ratio stands at 21.5, compared to its long-term average of 15.5, according to Refinitiv DataStream.
A key factor that has helped sustain valuations has been ultra-low interest rates, which are likely to change now that the Federal Reserve is becoming more aggressive on inflation concerns, he noted. Phipps.
Rising interest rates increase the costs of borrowing for businesses and consumers, while higher rates can also lower multiples of stocks, especially for technology and other high-growth stocks.
The tightening of the labor market and the strengthening of the economy pushed the Fed to announce last week that it would end its pandemic-era bond purchases in March. This could open the door to three quarter-point interest rate hikes by the end of 2022.
Those responsible for the Fed They also foresee inflation to stand at 2.6% next year, above the 2.2% projected in September.
At the same time, companies continue to battle supply disruptions due to the pandemic, which appears to be entering a new, exacerbated phase as omicron cases rise worldwide.
The possibility of a more rapid spread and new restrictions looms over some countries before the holidays. Since the beginning of the month, COVID-19 cases in the United States have risen 50%, according to a Reuters tally.
“There are many things that can go wrong”, Indicated Christopher Harvey, Head of US Equity Strategy for Wells Fargo Securities, which sees greater probabilities of a market decline of approximately 10% for the next austral summer.
US companies have managed to maintain profit margins this year by cutting costs and passing high prices on to customers. However, it is unclear to what extent the latest risks will change the 2022 profit estimates and results.
Estimated earnings growth for the S&P 500 for 2022 was 8.3% through Friday, down from 8% in early December, according to data from Refinitiv.
“Earnings estimates are actually going up in December, so omicron is not even factored into the estimates at this time.”, He commented Nick Raich, CEO of the independent research firm The Earnings Scout.
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