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Earnings remain key to returns amid inflation and rates shock
Global stock markets could be powered higher by strong corporate earnings in the months ahead, experts believe, despite ongoing expectations for tighter monetary policy measures potentially weighing on valuations through the rest of this year and into 2022.
‘We expect earnings to drive returns in 2022,’ said analysts at US bank Wells Fargo, who estimated that earnings per share for the S&P 500 will increase to $220 in 2022. That compares to a 2022 earnings consensus forecast of $205.45, according to data compiled by Refinitiv, and $187.17 for this year to 31 December.
If those estimates prove correct it would imply earnings growth of between 10% and 18% in 2022. ‘Our year-end  median price target for the S&P 500 is 4,900,’ the Wells Fargo analysts said, 16% above current 4,225 levels.
Rising inflation and how best to manage it has been on the minds of economists and investors right through 2021 yet the debate looks set to run and run. Fresh economic projections released after the Fed’s policy meeting on 16 June showed 11 of 18 policymakers are pencilling in at least two quarter-percentage-point rate increases by the end of 2023, a shift from March when a clear majority of policymakers favoured no change to borrowing costs until 2024.
The tilt to a faster than expected start to hiking rates caught markets by surprise and saw a sharp sell-off in US stocks, which suffered their worst week in several months. The Dow Jones posted its largest weekly fall since October while European markets followed with a broad sell-off. The UK’s FTSE 100 lost 1.6% before rebounding.
Japan’s Nikkei 225 index enjoyed a particularly see-saw response to the Fed’s meeting, slumping more than 3% on 21 June and rebounding by a similar amount in percentage terms on 22 June.
The Bank of Japan made its first purchase of exchange-traded funds tracking Japanese stocks since April as it stepped in to support the market.
IMPROVING ECONOMIC PROSPECTS
‘The takeaway from the Fed meeting was straightforward, the long-run outlook for economic activity is better, the long-run outlook for inflation is unchanged,’ said analysts at Jefferies.
Quite how the inflation versus recovery debate plays out in the UK is also up in the air. The Bank of England has indicated a greater willingness to dial back its emergency stimulus but it is not facing the same pace of price rises as the US, which is dealing with an annual inflation surge to 5%.
‘The Bank of England is likely to talk of upside risks to its existing inflation view for this year while also reiterating its message that much of the current price surge is likely to be transitory,’ believe analysts at Nomura.