Quarterly Market Outlook: What Lies Ahead for the Third Quarter of 2022?

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By Scott Kubie, Senior Investment Strategist 

 

The first half of the year proved challenging for even the most hardened of investors. High inflation. Continual losses in the S&P 500. Bear market. Fed rate hikes. It all added up to the third most volatile market in 25 years.   And while the economy isn’t going to just turn on a dime and recover overnight, there is hope for a better second half of the year. Read on to see what we anticipate could happen over the coming quarter.  

S&P 500 Earnings Are Likely to Moderate

Based on what we’re seeing so far, we anticipate that S&P 500 earnings could climb 10% this year. While this might not match the astonishing 50% rebound we saw last year, the moderation in growth shouldn’t be taken as bad news.  

After all, last year’s growth benefited from easy comparisons to quarters heavily affected by the COVID-19 pandemic. This year, the comparisons are far tougher. Not only was the economy more open last year, but those quarters benefited from consumers making up for low spending in 2020 and from large amounts of government aid.  

Two sectors that could skew earnings are energy and retail, primarily due to inflation and supply chain concerns. Earnings-per-share may be pushed higher if energy stocks report big gains due to higher prices, but short-term earnings shocks upward aren’t as valuable as margin or sales growth that can be sustained for long periods. And supply chain issues may continue causing headaches for the big box retailers. We’ll be watching both of these areas closely. 

Valuations Could Move to a More Normal Range 

The decline in the equity market pushed valuations down to levels in line with the period between 2015 and 2020. The difference is that interest rates are much higher today – and that tends to push fair price-to-earnings values lower.  

While uncertainty is a bigger challenge to markets, valuations could rise if other factors move in the right direction. 

Q3 2022’s Five Big Risks

Each quarter, we identify five big risks we think will affect markets. Here’s what we see as potential challenges to look out for in the third quarter of 2022: 

  • Inflation: Will the effects of low interest rates, excessive fiscal stimulus and supply constraints make the inflation surge too strong to be controlled? The populace seems very worried about inflation. 
  • Recession: Will the Federal Reserve raise rates too high and push the economy into a recession?  
  • Virus variants: Will virus mutations undo the economic recovery? Many people have arrived at their new normal. Some are still taking their last steps to a new normal. A more powerful COVID variant could undo some of those gains. 
  • Russia: Putin’s decision to invade Ukraine provided a stark reminder of a world filled with people of ambition and a desire for power. Escalation remains the biggest market risk, followed by collateral damage to the European economy.  
  • Investor behavior: Will the return of risk scare people out of the market? Markets rose more than 10% annually during the Cold War even amid the strife and uncertainty of the free world’s conflict with Communism. History offers encouragement to stay invested.  

Are We Due for an Upswing?

Only time will tell if we’ve hit bottom yet. But from our view, the signs are pointing to the beginnings of a recovery. Markets have already gone down, and much of the bad news is reflected in prices. Inflation, big rate hikes and Russian aggression can get worse, but they aren’t going to be new problems in this cycle. Inflation seems to be moderating, and some data points driving inflation are dropping. Energy prices recently fell. Unfilled positions are starting to decline. And other data show some slowing inflation pressure.   

Historically speaking, we’re in the worst year for markets in the four-year presidential cycle. The “honeymoon period” with a new administration is wearing off, which often leads to uncertainty. And there has been extra uncertainty this year – with more people mistakenly conflating their investments with their political views. As we get closer to November, uncertainty should begin to wane.  

And what about talk of recession? The jobs data indicate it’s unlikely this year. The future may be more challenging, but we aren’t there yet. Regardless of the short-term economic trend, it’s rational to have faith in a system that has worked so well for long-term investors.  

 

Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing.

The views stated are not necessarily the opinion of Cetera Advisor Networks and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein.  Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed.  Past performance does not guarantee future results.

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