NEW YORK- Profit growth for US corporations is expected to slow next year after a gangbuster 2021, with rising inflation and a rapidly spreading COVID-19 variant adding to uncertainty as investors try to justify stock prices trading near record highs.
The S&P 500 is on track to rise about 24 percent this year, and the index’s price-to-earnings ratio sits well above its long-term average, raising worries the market may be overbought.
S&P 500 earnings are seen up about 8 percent in 2022 after an estimated 50 percent jump this year, when companies rebounded from lockdowns and recession in the early stages of the pandemic, according to IBES data from Refinitiv.
Wall Street’s 2022 consensus estimates have changed little in recent weeks even as stock indexes have lost ground amid worries over how quickly the Omicron variant is spreading.
“We are moving into an environment where we’re likely to go from seeing multiple expansion to multiple compression,” said Robert Phipps, a director at Per Stirling Capital Management in Austin, Texas, referring to a company’s earnings rising but its share price not following suit, leaving investors with little reward.
The forward price-to-earnings ratio for the S&P 500 is at 21.5, compared with its long-term average of 15.5, according to Refinitiv DataStream.
A key factor helping to support valuations has been ultra low interest rates, which is likely to change now that the Federal Reserve is becoming more hawkish with inflation worries rising, Phipps said.
Rising interest rates increase borrowing costs for businesses and consumers, while higher rates also can depress stock multiples, especially for technology and other growth stocks.
The tightening labor market and strengthening economy pushed the Fed last week to announce that it would end its pandemic-era bond purchases in March. That could open the door for three quarter-percentage-point interest rate increases by the end of 2022. – Reuters
