Zacks Investment Management

Happy New Year! Now is the perfect time for investors to start thinking about possible investment themes for 2022. In today’s Steady Investor, we take look at three to consider:

• Omicron’s effect on the U.S. and global economy
• Rising wages
• Corporate earnings in 2022

Will Omicron Slow the U.S. and Global Economy? Reports of rapidly rising Omicron (Covid-19) cases have gone global. Here in the U.S., the rapid spread in some parts of the country has caused consumers to pull back and some employees to skip work, either to avoid getting infected or to avoid spreading to others. Some of the retrenchment is starting to appear in the economic data – the number of seated diners at restaurants was down 15% in the week ended December 22 (compared to the same period in 2019), and U.S. hotel occupancy was at a very low 53.8% for the week ended December 18. There have also been increasing reports of shows being canceled, classes shifting online, and offices reversing reopening plans. Taken together, these changes in consumer and worker behaviors appear likely to impact Q4 2021 and Q1 2022 GDP growth figures. The latest estimate for Q4 shows the U.S. economy expanding at approximately 7.6%, but that figure is likely to come down, and Q1 2022 estimates are likely to be cut in half in the coming weeks. Even still, each iteration of a pandemic wave has had a smaller impact on overall economic growth, and in our view, the impact of the Omicron variant is likely to be smaller than the impact of the Delta variant.¹

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Wages Move Higher, Providing a Headwind to Inflationary Effects – Inflation has been the big story in 2021, but we think it is important to also acknowledge a countervailing force – rising wages – that could offset the impact of rising prices. Indeed, U.S. professionals in 2021 have experienced the biggest compensation increase in almost 20 years, according to the Department of Labor. Inflation, of course, is also running its hottest in close to 40 years, so the ‘real’ impact of rising wages is muted relative to rising everyday expenses. Looking ahead, however, there is a distinct possibility that inflation pressures could fade while wages remain at newer, higher levels. For private-sector workers in aggregate, wages grew at a 4.6% year-over-year pace in Q3 2021, with the biggest increases landing in service sector occupations like retail and hospitality. For higher-skilled workers in management, business, and financial occupations, wages rose by a lesser 3.9% over the same period, but this increase still marks the fastest pace of rising wages since 2003 for this group. In our view, there is a reasonably good chance that wages will keep rising in 2022 as inflation moderates. According to the Conference Board, employers are setting aside an average of 3.9% of total payroll for wage increases in the new year, the most since 2008.³

What Will Corporate Earnings Look Like in 2022? In the third quarter of 2021, U.S. corporate earnings notched a new all-time quarterly record, surpassing the record set in the preceding period. What will Q4 2021 and beyond look like? So far, Q4 2021 looks to be another strong quarter, even though estimates have come down slightly over the past few weeks⁴:

In our view, falling earnings growth estimates are tied to the Omicron impact, but we could also be at the beginning of a normalization of earnings trends from a relatively bizarre and unexpected two-year period. Earnings surprises – which have largely been to the upside – are moderating towards the longer-term trend. The aggregate tally of total earnings remains very high, and there is a breadth of strength across all the key sectors. But we also know that the unusually high growth rates of 2021 will not continue into the new year, as they in part reflect easy comparisons to the year-earlier periods that were severely impacted by Covid-related disruptions. This ‘return to normalcy’ does not necessarily have to be a negative, as long as corporations continue to meet or exceed expectations.

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