Zacks Investment Management

With the exception of mostly Energy stocks, the broad U.S. stock market has been locked in correction mode for the last few weeks. Technology companies and growth stocks have been among the hardest hit, but even mega-cap companies with steady earnings have felt the pressure. As I’ll explain below, every new day of volatility makes me more bullish for full-year 2022.  

To be fair, financial headlines don’t make dealing with the volatility easy. The focus is constantly on the challenges and the economic negatives, like high inflation, rising interest rates, spiraling crude oil prices, and concerns about economic shockwaves that could ripple from the war in Ukraine. But no one ever talks about earnings, which is why I think investors should embrace the current market volatility, not fear it.

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Focus On Key Data Points Instead of Negative Headlines

In times like this when market volatility is becoming a huge concern for investors, it is important not to lose sight of the long-term view. Don’t let the media and sudden changes in the market cause you to make knee-jerk responses based on emotion.

I recommend that investors remain calm and not let emotions take control of their investments. To help you do this, I am offering all readers our just-released March Stock Market Outlook report. This report contains some of our key forecasts & factors to consider such as:

• Zacks Rank S&P 500 Sector Picks
• Zacks view on equity markets
• What produces optimism?
• Zacks forecasts
• Zacks ranks industry tables
• Sell-side and buy-side consensus

And much more…If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today!

Free Download – March 2022 Stock Market Outlook Report!²

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Said another way, when economic positives are under-appreciated, and negative news stories accompany sharp, sudden, scary selling pressure, that almost always means it’s a great time to be bullish.

Consider this data for 2022 through February 28:

• S&P 500 Price Return: -8.2%
• Decline in S&P 500 valuation multiple: -10.7%
• Change in S&P 500 Earnings Growth: +2.4%

S&P 500 earnings have been going up while the index has been falling, which also means the P/E ratio on the U.S. stock market has moved lower. The investor read-out here is that stocks have gotten cheaper relative to corporate earnings, which investors should see as an opportunity, not an omen. ¹

This optimistic framing of the current market is especially true if an investor expects the U.S. economy and U.S. corporations to grow in 2022, which is our base case here at Zacks Investment Management. I’m looking for the U.S. economy to grow nominal GDP above trend this year, which I could see hitting ~7%. Since corporate earnings and revenue track GDP growth, I’d also expect corporations to have a good year.

At Zacks, we are currently calling for +7.3% earnings growth for the full year of 2022, on +6.2% revenue growth. Of course, this is a far cry from the 49.9% earnings growth posted in 2021, but that year was also gangbusters because of easy comparisons with the global economic shutdown year in 2020. By most accounts, 2021 was a strong growth year even with pandemic pressures, so an additional 7+% earnings growth in 2022 is meaningful.

Profit margins are also not mentioned very often in the financial news, but from a fundamental analysis viewpoint, it is hard to be bearish when margins are this good. S&P 500 companies are expected to generate 12+% profit margins throughout 2022, continuing a strong trend established in 2021 (see chart below). Before the sizable December 2017 corporate tax cut, profit margins were consistently below 10%.³

I do not mean to downplay the current economic headwinds and geopolitical challenges the world faces. But in fairness, those seem to be the only things the media focuses on, which means positives are being ignored during a period of heightened volatility – a confirmation of a correction (not a bear), and a recipe for more bull market, in my view.

Bottom Line for Investors

The pushback against the bull case is that stocks are already expensive, and the Fed is poised to tighten financial conditions throughout the year. But it’s also true that the current market pullback has led to multiple compression, such that the S&P 500 is trading below 19x forward earnings while the 10-year U.S. Treasury bond yield remains below 2.5%. If aggregate S&P 500 earnings reach $250 by the end of 2022, I think there’s a good case in arguing that the stock market is currently quite cheap.  

As for the Fed, I think it is important to remember that 2022’s rate increases are coming off an era of very easy monetary policy, such that six rate increases would still mean seeing the fed funds rate at 2% – very low by historical standards.⁴ I think the right framing for 2022 is that the Fed is taking steps to remove excess accommodation and tamp down inflation, not paralyze the economy.

The bottom line in the current environment is that stocks have gotten cheaper, fundamentals have largely remained the same, and investors are arguably more worried than ever. This to me marks a compelling setup for embracing volatility, not fearing it.

To help you embrace market volatility, I recommend that investors do the appropriate research to better invest towards their long-term goals. I am giving exclusive access to our Just-Released March 2022 Stock Market Outlook Report.

You’ll discover Zacks’ view on:

• Zacks Rank S&P 500 Sector Picks
• Zacks view on equity markets
• What produces optimism?
• Zacks forecasts
• Zacks ranks industry tables
• Sell-side and buy-side consensus
• And much more

If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free guide.

Disclosure