Weekly Market Update 1/26/2022
Wall Street’s attention will now turn to the corporate world, with the commencement of fourth-quarter earnings season at hand. Kicking the period off will be a batch of financial results from the big banks. The consensus is that earnings advanced further in the final quarter of 2021, even as worries about surging COVID-19 cases, with the Omicron strain of the coronavirus spreading rapidly, gave investors some pause late in the quarter.
A strong showing on the earnings front may be needed if the U.S. stock market, which established another record high at the start of 2022, is going to push forward. This task may be made more challenging by a Federal Reserve that is poised to pull back on the level of monetary support. The central bank’s plan is to finish the tapering of its monthly bond-buying program by early spring and then begin to raise short-term interest rates thereafter.
Our central bank will attempt to rein in inflation, which surged during the final quarter of 2021, without hindering the current pace of economic expansion. Recent gains in consumer spending, holiday retail sales, and continued expansion in manufacturing activity suggest the economy is strong enough to handle the tapering of the bank’s bond-buying activity which added a stream of liquidity to the financial system.
Are we approaching a period where the fundamentally strong companies garner the most investment interest? This has not necessarily been the case since the Federal Reserve loosened the monetary reins, which gave a boost to many of the higher-growth, but often less-capitalized, companies. With the central bank likely wedded to a tightening approach, those companies that demonstrate solid earnings growth and steady cash flows may be best positioned to perform well in a period of reduced monetary and fiscal support, as some pandemic-era stimulus programs end.
Conclusion: While equity market valuations are elevated following the strong conclusion to 2021, investors should maintain a healthy concentration of stocks in their portfolios. The consensus is that earnings for S&P 500 companies will increase further in 2022, which may provide the catalyst for another step-up for stocks, assuming the Fed pushes the right buttons with regard to monetary policy.