2022 Equity Market Outlook

PUBLISHED BY RAYMOND JAMES & ASSOCIATES

Michael Gibbs, Director of Equity Portfolio & Technical Strategy

Joey Madere, CFA

Richard Sewell, CFA

For the full 2022 Equity Market Outlook- Click Here

The S&P 500 is poised to finish 2021 up over 20% as it has fed on very loose financial conditions and the re-opening of the economy. Despite inflation moving higher and ongoing supply chain issues, the U.S. consumer remains healthy and overall demand continues to be strong. With this backdrop, the macro environment is support for equities to continue to move higher in 2022 with our yearend S&P 500 base case price target of 5,053. GDP (FOMC is projected 4%) is expected to remain above trend in 2022, which we believe should drive sales growth to be in excess of inflation leading to margin expansion in excess of consensus expectations andEPS growth of double digits (our 2022 EPS estimate is $235 vs. $205 for 2021).

Overall, we see tapering and tightening as more of a process beginning with a transition from rapid expansion of the Fed’s balance sheet to a slowing/stabilization period and eventually reducing the balance sheet and raising fed funds rates. At each step, stocks could see some added volatility, but unless other factors (macro slowdown, fears of runaway inflation, etc.) evolve, we believe draw downs should not be terminal for the bull market- although some may be deeper than “normal” and reach beyond 10%. We continue to have a pro-cyclical bias, but believe it is prudent to remain balanced with areas levered to the pandemic recovery along withpandemic winners. Secondly, we have a bias towards small-caps given the expectation for better growth and relative valuation is at a 27% discount (vs. the 15-year average of an 8% premium) to large-caps. Finally, we continue to believe dividend paying stocks offer an attractive alternative to bonds with the S&P 500 dividend yield roughly in-line with the 10-year yield. However, itwill be important to not get complacent and have a willingness to adapt to changes in 2022 as there continues to be a lot of wildcards, as supply chains remain in flux, inflation remains elevated, and the Fed begins to tighten.