Stock market forecast 2022: Will equities rebound?
Global stock markets are in the midst of a massive correction, the biggest since Covid-19 hit in 2020. Unlike then, though, the current pressures are more endemic, with huge supply shortages and Russia’s invasion of Ukraine putting pressure on prices.
But with those tensions combining with a cyclical slowdown that threatens to last, analysts are warning the pain for equities may just be beginning.
The S&P 500 (US500), a list of the top 500 public US companies that make up 80% of total market capitalization of the US market, reflected broad macroeconomic expansion, supercharged by public stimulus in the face of Covid-19. Between 2019 and 2021 the index grew by nearly 75%, rising 28.88% in 2019, 16.26% in 2020 and 26.89% in 2021.
This year the index is giving up most of its gains, contracting 18.14% in 2022. The S&P 500, mostly made up of tech, healthcare and consumer discretionary stocks, has suffered from poor confidence, falling back below 4,000 – levels last seen in March 2021.
It reflects a crumbling risk appetite among investors. Cathy Wood’s ARKK ETF, a benchmark innovation fund, has contracted more than 50% year-to-date, marking a wider drop in confidence that has seen investors flee stocks regarded as overvalued.
Meanwhile, according to projections by LongForecast, the Nasdaq 100 may have peaked long ago, which raises uncertainty about its actual floor.
The index most recently closed at 12,034.28 points, up 1.68% in the day, as it struggles through the midst of a plunge back to November 2020 levels.
The FTSE 100 (UK 100), composed of the biggest UK-domiciled public companies, experienced a falloff similar to US stocks when the pandemic initially hit.
But unlike the S&P and the Nasdaq, the rebound was a much more protracted affair, despite macroeconomic conditions of government stimulus and consumer confidence largely being the same in both economies.
The index lost more than 31% of its value in the space of a month when the pandemic first hit in March 2020, and has experienced relatively steady growth since.
Even in the face of wide volatility and pessimism, the index has only contracted 0.66% year-to-date, regaining losses experienced by news of Russia’s invasion of Ukraine. Energy stocks are propping up the index in the face of shortgages across Europe.
The index closed on 23 May at 7,452.05 points, down 0.82% over the day.
Soaring inflation and interest rate rises
Inflation once labelled transient by policymakers on both sides of the Atlantic now looks to be making itself comfortable.
The consumer prices Index (CPI) is at 8.3% in the US, 9% in the UK, and 7.4% in the euro area, the former two moving at 40 year-highs while the euro area floats around its highest rate since its inception.
This has been caused by a myriad of factors. Global supply chains have been unwinding since Covid-19 hit, with supply struggling to keep up with demand as everything from oil to semiconductors fall into low levels.
Most major companies are citing soaring costs in their earnings. Walmart (WMT), for example, said fuel costs alone were $160m more than expected in the first quarter of 2022.
Those pressures have been exacerbated by Russia’s invasion of Ukraine, which has made energy more insecure. The country’s demand that customers pay for its gas in roubles could lead to pipelines being turned off. The siege of Ukrainian ports is also thought to have left the world with 10 weeks’ supply of wheat, a food insecurity expert told the UN.
These rising costs are in turn pushing up consumers’ expectations of future inflation. In the US, Americans expect inflation to be 6.3% next year, encouraging them to spend more now, which contributes to inflation. Wage increases too, rising past 5% in April 2022, which could add further to costs in a wage-price spiral.
Is it the right time to invest in the stock market?
Many, though, suspect the current environment is itself deflationary. As consumers spend more on essential items like fuel and food, large levels of savings and discretionary spending are likely to dwindle, reducing demand and in turn inflation.
In addition, central banks are refusing to hang around under the temptation of keeping costs low. The US Federal Reserve (Fed) invoked its largest rate rise since 2000 as the money market rate rose 0.5 percentage points to bring it to a range between 0.75% and 1%.
The Bank of England (BoE) also raised its main rate by 0.5 ppts, with more rises expected. These moves, it is hoped, will slow inflation and bring more stability to the economy and return confidence to equity markets.
But these contradictory factors also increase the risk of recession. The dollar is hitting 20 year highs and bond yields are rising, signalling pessimism among investors towards risky assets and driving signals of economic contraction.
Low levels of demand would indicate public companies will lose the ability to pass on cost increases to their customers, further hitting profits and seeing investors flee further into safe havens.
Stock market forecast for the next 6 months
Stock market predictions for 2022 look much different from those presented the same time last year, with analysts all pointing to a punishing macro environment that will cool investment for some time.
In a note, Susannah Street, senior investment and markets analyst at Hargreaves Lansdown, said the current headwinds gripping markets may take time to cool, dampening stock market predictions.
US stock market forecast
Russ Mould, head of investments at AJ Bell, told Capital.com in his analysis that the pain may just be beginning for struggling equities, but markets like the UK and Europe, where valuations weren’t as stretched, are coming out better from the current correction.
“A lot of the more speculative areas – cryptocurrencies, special purpose acquisition companies (SPAC), initial public offerings (IPO), loss-making start-ups – have been hard hit, especially in the USA, where valuations were more extreme, but that is usually only phase one of a bear market,” Mould told Capital.com in a note.
Mould said tech may lose its mantle as the driver of stock markets in a new macro environment in his share market forecast.
Ultimately, the stock market outlook for 2022 appears to be one centred on pessimism, pivoting and diversification.
Note that analyst predictions can be wrong. Forecasts shouldn’t be used as a substitute for your own research. Always conduct your own diligence and remember that your decision to trade or invest should depend on your risk tolerance, expertise in the market, portfolio size and goals.
Keep in mind that past performance doesn’t guarantee future returns. And never invest or trade money that you cannot afford to lose.
When will the stock market recover?
The stock market may recover if supply chain shortages continue to ease and inflation and interest rate rises work to cool demand. But Russia’s invasion of Ukraine, and the knock-on effect to energy markets, may make pessimism protracted. Note that analyst predictions can be wrong. Always conduct your own research before trading or investing.
Is the US stock market going to crash?
The US stock market has already experienced heavy selloffs in 2022. AJ Bell’s Russ Mould suggested poor earnings results may lead to a large exodus from equities. Note that analyst predictions can be wrong. Always conduct your own research before trading or investing. And never invest money that you cannot afford to lose.