Thursday, May 19, 2022
This is a macro driven market. So even as the S&P 500 Index nears a bear market, until we get better news on the macro front, volatility will likely continue. There is a long list of macro worries right now, including sky-high inflation, rising interest rates, an aggressive Federal Reserve, a possible U.S. recession, China’s ongoing COVID-19 lockdowns and resulting supply chain disruptions, and war in Ukraine. So while LPL Research believes that stocks generally offer good value relative to companies’ earnings power with the S&P 500 Index near 3,900, that value may unfortunately take more time to be realized.
Once economic conditions begin to improve, earnings will start to matter again. The combination of growing earnings and more attractive valuations can be powerful. Companies have broadly demonstrated that they can grow earnings at a solid pace despite these intense cost pressures, even though there have been signs that the environment has been getting more challenging for certain industries, particularly retail. When those pressures start to abate, earnings will strengthen and get more attention. For longer-term investors, that earnings power will provide a solid foundation for higher stock prices.
“The bears might say that stock valuations are not attractive because the earnings may not come through,” noted LPL Equity Strategist Jeffrey Buchbinder. “But corporate America has a profit margin problem, not a revenue problem. And the causes of those margin pressures are likely to abate in the second half of the year.”
U.S. earnings continue to stand out globally
U.S. stocks are trading at more expensive valuations than their international counterparts, as they have been for quite some time. However, the LPL Chart of the Day illustrates the continued earnings superiority of the U.S. equity market, which suggests that U.S. outperformance over the past year has been justified. While international stocks have outperformed the U.S. over the past couple of months as the selloff in domestic tech stocks has accelerated, we would expect U.S. equities to lead the rebound on the other side.
While earnings estimates for U.S. equities have continued to rise in recent months, albeit gradually, expectations for international earnings in both developed and emerging markets have been reduced. Stronger earnings growth potential and less impact from the Russia-Ukraine conflict still support our preference for U.S. equities over Europe, which makes up the majority of the developed international markets benchmark. We are watching for more geopolitical stability and a weaker US dollar to potentially get more interested in international equities from a tactical perspective.
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments. For more information on the risks associated with the strategies and product types discussed please visit https://lplresearch.com/Risks
References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
Unless otherwise stated LPL Financial and the third party persons and firms mentioned are not affiliates of each other and make no representation with respect to each other. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services.
All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
Securities and advisory services offered through LPL Financial, a registered investment advisor and broker-dealer. Member FINRA/SIPC.
Tracking # 1-05280987