Market Strategy 7/07/2022
Don’t Stop Believin’
Although we are revising our price target lower, we remain bullish on US equities
Key Takeaways
- We are updating our price target for the S&P 500 at year-end 2022, in light of the 20.6% downdraft over the first half of the year.
- Based on the index’s closing level of 3845.08 on July 6, we see 24.8% upside in the index by year-end to establish a target of 4800.
- Our price target is based on our earnings projection of $230 per share for the S&P 500, which is unchanged from our previous forecast and which, coupled with our revised target, implies a P/E multiple of 20.9x.
- We believe US economic fundamentals remain on solid footing. US growth should remain well-supported by consumer demand, business investment and government spending.
We are updating our price target for the S&P 500 for year-end 2022, in light of the 20.6% downdraft over the first half of the year. Based on the index’s closing level of 3845.08 on July 6, we see 24.8% upside in the index by year-end to establish a revised price target for the S&P 500 of 4800. Our price target is based on our earnings projection of $230 per share for the S&P 500, which is unchanged from our previous forecast and which, coupled with our revised target, implies a price/earnings multiple of 20.9x.
A rally to 4800 by year end would imply a scant 0.7% gain in the S&P 500 for the full year in 2022. Recall that on December 10, 2021, we initiated a price target for the S&P 500 by the end of 2022 of $5330. Our price target was then based on our earnings projection of $230 for the S&P 500, which implied a 23.1x multiple.
In our portfolios and recommended allocations, we continue to favor stocks over bonds with an emphasis on US securities while maintaining meaningful exposure to developed and emerging-market stocks. Among sectors, we continue to overweight cyclicals over defensive stocks and favor technology, consumer discretionary, industrials and financials. We also maintain exposure to the energy and materials sectors as demand remains high for these products as economies continue to reopen around the globe. We’ve updated our Global Asset Allocation (see p. 4 ahead) to show our stance on the major asset classes.
How did we get here?
Over the course of the second quarter of this year as stocks took a drubbing across major indices stateside and abroad, we have often been asked if we planned on addressing our S&P 500 target price and earnings projection of 5330 and $230, respectively, for year-end 2022. The target and earnings projection, which we initiated on December 10, 2021, at the time implied potential upside of some 13% (or about half of what the S&P 500 came to deliver for the full year 2021).
In arriving at our target price in December of last year for year end 2022, we considered that there would likely be a number of risks that could present hurdles for the market in the year ahead including those from: COVID-19 and variants; the complexity of re-opening segments of the economy which had been shuttered for most of the pandemic period; supply chain disruptions; labor shortages; levels of inflation that were pointing to the Federal Reserve’s delay in adjusting monetary policy to higher inflation as well as the thought that there would likely be a period of rough comparisons to economic and earnings growth that had reflected high levels of fiscal stimulus and monetary policy accommodation deployed at the height of the pandemic which would likely be in the process of being reduced and eventually removed from the landscape by the Fed and Congress in 2022.
The aforementioned taken into consideration of our target seemed reasonable as the S&P 500 had performed exceptionally well successfully climbing the proverbial “wall of worry” in 2020 and in 2021 notwithstanding plenty of challenges and in fact seen the S&P 500 respectively delivering price returns of 16% and 27% for 2020 and 2021 (not including dividends paid for those years and excluding applicable costs).
Half as much of a gain in 2022 versus 2021 seemed conservative to us at the time. It took into account challenges that remained on the landscape tied to the re-opening of the US and other economies around the world from the pandemic: the policy pivot by our central bank to address higher than expected levels of inflation and likelihood for quarterly earnings comparisons that might prove challenging as growth normalized with the re-openings.
The best-laid plans
That said, the incursion into Ukraine by Russia and China’s lockdown of Shanghai (a city of over 25 million people) as well as of other cities in China added catalysts over the course of the first half of this year which have, along with higher and stickier inflation, added enough uncertainty and soured sentiment to negatively challenge equity market performance to a greater extent than we had earlier expected.
Adjusting our S&P 500 2022 year-end price target
Even in the face of uncertainty and palpable risks of recession, our longer-term outlook for the US economy and the stock market remains decidedly bullish. We believe US economic fundamentals remain on solid footing. US growth should remain well supported by consumer demand, business investment, and government spending.
The end of free money
While inflation remains a concern, the Fed’s pivot to a less accommodative stance leaves us feeling optimistic that price pressures will abate as supply chain and transportation issues are resolved. In time, the competitive pressures— driven in part by technology and innovation— that kept prices in check over the previous economic cycle should re-emerge as companies adapt to a new economic reality.
We continue to expect that a growing US economy will help power a global recovery as US import demand draws in goods and services from around the world. We anticipate positive corporate earnings growth, a key driver of equity valuations.
Where we stand
- We remind investors and traders to know what they own, why they own it, and have reasonable expectations as to how their investments will perform in a highly transitional environment.
- We persist in favoring cyclicals over defensive sectors.
- Established tech companies whose products and services are deeply embedded in the lives of business and consumers are likely to prove to be key holdings.
- Industrials sector exposure to agriculture, manufacturing, energy, construction, infrastructure, aerospace and defense should continue to be attractive as economic growth shows sustainability and the global supply chain moves away from one-country centricity.
- We don’t expect a de-globalization, but rather a re-globalization with a more diversified global supply chain to benefit more than a few emerging and developed economies.
- Energy likely has further upside though not necessarily in a straight line after last year’s and this year’s sizable run-ups.
- The materials sector appears to have further upside potential as expansion gains traction stateside and elsewhere around the world.
- Consumer discretionary: we suggest investors not bet against the resiliency of the American consumer.
- We expect that the Fed may well be able to avoid a hard landing. That said, a bumpy landing is not out of the question
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