Some analysts are promoting an optimistic view of the second half of the year. They believe both corporate profits and the stock market will vastly exceed expectations.
Citi strategist Scott Chronert said, “We see room for U.S. equities to work higher into year-end ‘22, triggered by more resilient earnings than commonly expected, and potential valuation relief as Fed hawkishness is more fully priced in.”
Chronert says he believes the S&P 500 should rally about 9% from current levels, ending the year at 4,200.
Chronert goes on, “We conclude that the inflation surge beginning about this time a year ago has mostly been an incremental positive for earnings growth. Simply, strong pricing has offset supply constraints and upward cost pressure. We don’t expect a new structural paradigm at this point, but do think that current earnings tailwinds can continue in the immediate term.”
The S&P 500 is presently trading around 3855.
At present however, markets are being far more cautious with respect to the outlook for corporate profits than Chronert is portraying. And not without reason. The S&P 500, Nasdaq, and Dow have all had their worst first halves in several decades, and now the Fed in promising the most aggressive monetary tightening in decades, as inflation is at multi-decade highs.
There have been no ports in the storm. Previous gazelles which outpaced everyone like Amazon (AMZN), Tesla (TSLA), and Netflix (NFLX) have all dropped over 30% in 2022. Apple (AAPL), a well-known safe-haven, is down 18% on the year.
So far this year only one sector, Energy, is in the green, year-to-date.
Earnings are also poised to underwhelm as second-quarter earnings season is about to begin.
According to data from FactSet, the earnings growth rate for S&P 500 companies in Q2 is estimated to be 4.3%. That would be the lowest growth rate produced by the S&P 500 since Q4 of 2020. Darkening the outlook, 71 S&P 500 companies have downgraded earnings estimates.
Oppenheimer strategist John Stoltzfus recognizes the headwinds, but is still optimistic as well, saying, “We do expect there are going to be [earnings] disappointments, but we do expect there will be some remarkable surprises over the course of the next few quarters.”
A well-known, ardent Bull, Stoltzfus has however, recently lowered in year end target for the S&P 500 from 5.330 to 4,800. However 4,800 is still almost a 25% gain over the present value.
