Is The Stock Market Poised For a Second Half Turnaround?
Reviewing the first half and looking ahead at the rest of the year.
Reviewing The First Half of 2022
Seemingly from the first day of trading in 2022 markets were determined to sell. For the exception of a broad market rally in March, markets have sold off every month. From fears over the long term effects of inflation, the Russia and Ukraine War, continued supply chain pressures, poor company earnings, the Federal Reserve raising interest rates, and increasing worry about a recession, it seems like we can not escape an endless cycle of bad news and fear. Will this end in the second half of 2022, and will we see a stock market rally? Let’s dig in.
What The Banks Think
To summarize the chart above, while the estimates for the S&P 500 have come down from the beginning of year projections, every firm on this list has us finishing higher than we currently are. Credit Suisse is the most bullish of these firms, with Cantor Fitzgerald and Morgan Stanley having the most bearish outlook. Cantor Fitzgerald and Morgan Stanley only see the potential for a 2% run for the rest of the year, while Credit Suisse sees a run up of 28% by the end of year. While it would be nice to see a 28% run up to finish the year at 4,900 on the S&P 500, there is a reason to believe that might not happen: company earnings.
The Upcoming Earnings Season
As we approach the 2nd quarter earnings season, expectations for growth are slowly declining. Apple expects to take a hit of $4 billion to $8 billion due to supply chain issues in the 2nd quarter of 2022. If Apple, one of the largest companies in the world, is expecting to take a massive hit due to supply chain issues, then we will most likely see a theme of this in earnings. As for Google and other software companies such as Snapchat, Spotify, and Meta, who primarily make their revenue off of advertising, may struggle as well. In May, Snapchat CEO Evan Spiegel warned that due to worsening macroeconomic conditions, they expected their Q2 revenue targets would miss. This sent stocks like GOOG and META down, as SNAP plunged 40%, for its worst day ever.
We are left to wonder if much of this bad news we could get has been “priced in” to these stocks, meaning they might not see a massive draw-downs off of their earnings, but we should still expect to see some red if these companies miss earnings, especially is it is a dramatic miss.
Earnings season kicks off the week of July 11th with most of the major banks setting the mood for earnings, along with PepsiCo, Delta Airlines, Taiwan Semiconductor, and UnitedHealth other notable names reporting this week. For the complete earnings calendar, check out Nasdaq for their convenient earnings calendar.
Midterm Elections
Elections create uncertainty in markets, and with uncertainty comes selling. Should we be worried about midterm elections? History says, probably not.
According to Etrade, the Dow Jones Industrial Average generally underperforms pre-election, but outperforms the year following a midterm election. This follows true for the S&P 500 and Nasdaq indices as well. This means we should expect extra volatility in the time leading up to the election, but this could be seen as a buying opportunity to get stocks at a discount.
Inflation
Last, but certainly not least, is inflation. In May, we saw CPI jump to 8.6%, a 4 decade high. After April CPI came in at 8.3%, we were expecting a decline in May, but this did not occur. If we do not see this high level of inflation come down, more extreme measures will have to be taken by the Federal Reserve to bring down inflation. The next CPI reading for June is released on July 13th at 8:30 am EST. Because of the fall in commodity prices and oil, we should expect to see a steady decline in CPI for June, but whether or not it is anything significant is still left to be told.
What To Expect
Expectations for the second half of 2022 are a mixed bag. With a mix of bullish bets and bearish attitudes, even the experts do not know what to expect. In a world where inflation levels start to come down and company earnings meet or beat expectations, we could see a nice rebound in stocks. In a world where inflation does not come down, the Federal Reserve has to keep aggressively hiking rates, and company earnings disappoint, we could see a continuation of a terrible year in the stock market.