VIDEO: The Omicron Conundrum
Welcome to my video presentation for Monday, December 6. Below is a condensed transcript of my remarks.
Winston Churchill, a hero of mine, is considered the epitome of human persistence. During the darkest days of Britain’s confrontation with the Nazi menace, then-British Prime Minister Churchill said: “If you’re going through hell, keep going.”
Those words apply to the financial world’s stance toward COVID and its mutations such as Delta and Omicron. Despite the hell wrought by the pandemic, the bull market just keeps going.
To be sure, the emergence of the Omicron variant triggered a renewed bout of volatility last week in the markets, with sharp intraday swings stirred by headlines about the pandemic.
Yes, you should brace yourself for continued roller-coaster action as Q4 unfolds and we transition into 2022. But as I explain below, I’m generally bullish about the stock market’s prospects next year.
Jitters on Wall Street…
In addition to Omicron’s evolution, the big concern of the coming new year will be the extent of inflation’s intensity.
Adding momentum to the ups and downs of financial markets last week was testimony to Congress by Federal Reserve Chair Jerome Powell, who expressed greater concern about rising inflation and intimated that the Fed might accelerate the pace of its tapering of assets.
Largely due to uncertainty over Omicron and inflation, stocks racked up a losing week (see table).
Omicron is a conundrum with many “known unknowns.” How contagious, fatal, and lasting is the mutation? But vaccinations might come to the rescue again.
Health officials are suggesting that new or reformulated vaccines stand an excellent chance of providing protection against Omicron. Moderna (NSDQ: MRNA) last week indicated that the vaccine maker is working to roll out a reformulated COVID vaccine against Omicron early in 2022.
But Omicron has spooked investors, with stocks sharply gyrating last week between green and red, with the S&P 500 moving more than 1% in both directions in each of the last six trading days. Until the world gets more definitive answers about Omicron, this volatility is likely to continue.
And yet, cases of Omicron so far have been relatively mild. What’s more, no one expects a repeat of the worst of the pandemic, when infection and death rates soared, and lockdowns ensued.
Another puzzle is inflation. It’s unclear when supply chain disruptions will end and how “sticky” inflation proves to be. But amid these unknowns, we can derive encouragement from projected corporate earnings growth.
According to research firm FactSet, the Q3 2021 earnings per share (EPS) growth rate for the S&P 500 came in at nearly 40%. For Q4, analysts are projecting EPS growth of 22.4%. For calendar year 2021, analysts are projecting EPS growth of 44.1%.
The bottom-up EPS estimate for 2022 for the S&P 500 is $222.32. “Bottom up” reflects an aggregation of the median EPS estimates for CY 2022 for all of the companies in the index.
If $222.32 turns out to be the final number for 2022, it will mark the highest annual EPS number for the index since FactSet began tracking this metric in 1996 (see chart).
After almost two years of coping with the pandemic, consumers and businesses have adapted and they’re less likely to retreat into a defensive crouch. The stock market has been volatile but its upward trajectory has continued, a sign that Wall Street has adjusted its attitudes as well.
Another positive is global economic growth. For its latest projections, IHS Markit says global economic growth will continue in 2022 and into 2025, albeit at an uneven pace depending on the region (see chart).
My expectation for next year is that economic expansion, earnings growth, and consumer spending will continue to remain strong, providing powerful tailwinds for equities. That means cyclical sectors are smart bets now. When pandemic-caused uncertainties eventually wane, these economic reopening plays should enjoy even better conditions for appreciation.
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John Persinos is the editorial director of Investing Daily. To subscribe to John’s video channel, follow this link.