The Return of the Stock Picker’s Market
You’ve likely heard the saying, “a rising tide lifts all boats.” For the most part, that’s been the case in the stock market over the past two years. Since the March 2020 lows, the S&P 500 rallied 114%, the Dow has climbed 95%, the NASDAQ has soared 131%, and the small-cap Russell 2000 has increased 128%. Investors could have picked any index fund and felt pretty good about their decision.
In my opinion, it won’t be quite that easy in 2022. Investors will need to be a bit savvier with their investment choices.
I see several factors creating a headwind for the markets in the new year. Ongoing fears of COVID will continue to impact behaviors and the outlook for the economy. The Federal Reserve’s efforts to curb inflation, and their commitment to tamper bond purchases, will also make the environment for stocks more difficult. 2022 will be a more challenging environment for earnings growth.
We’ve already seen this play out in recent market action. Headlines about the new COVID-19 Omicron variant hammered the travel and leisure industry, with airline and cruise line stocks selling off hard. Then, the Fed admitted that inflation is no longer transitory and revealed its plans to taper its current bond-buying program and raise key interest rates in the New Year, which caused the stock market to hiccup and short-term bond yields to move higher.
Considering that COVID-19 and the Fed will remain two big headlines in 2022, earnings will also step back into the spotlight. Since the pandemic crushed many companies’ profits and revenues in 2020, comparisons were easy in 2021.
FactSet Research anticipates that S&P 500 companies will achieve 45.1% average earnings growth and 15.8% average sales growth in the calendar year 2021. To put this into perspective, the trailing 10-year average earnings growth rate and revenue rate for the S&P 500 between 2011 and 2020 were 5% and 3.5%, respectively.[1] It’s also important to note that 2021 is the highest yearly earnings and revenue growth recorded since 2008.
Now, as you can see in the chart above, earnings and revenue expectations aren’t as impressive going forward, with the S&P 500 expected to achieve 9.2% average earnings growth and 7.5% average revenue growth in the calendar year 2022. With a slower earnings and revenue environment, Wall Street will shift its attention to fundamentals again, as the rising tide will no longer lift all boats.
In other words, 2022 will likely mark the return of the stock picker’s market.
A stock picker’s market environment occurs when investors can select stocks with superior fundamentals to beat the broader indices rather than parking their money in index funds or ETFs. Typically, “stock pickers” will zero in on a few industries or sectors that they anticipate will outperform in the upcoming months and select stocks with growing earnings and revenues in this industry.
According to FactSet, industrials, consumer discretionary, energy, and information technology industries have the most robust forecasted earnings for the calendar year 2022.
The strongest industries in revenue growth include consumer discretionary, industrials, real estate, communication services, and information technology. So, one could gather that these industries are where many stock pickers are likely to focus their attention in the New Year.
Now, just because we’re anticipating a stock picker’s market in the New Year doesn’t mean that you should change your investment strategy completely. Remember, everyone’s investment goals, financial situation, and risk tolerance are different—and shifting to a stock-picking strategy isn’t suitable for everyone.
If you’re interested in owning high-quality stocks that have solid fundamentals and trade at reasonable prices, consider giving us a call at Nicollet Investment Management today. We can help you determine if an increasingly active stock-picking strategy complements your current financial plan and will help you reach your goals.
Please click here for important disclosures.
[1]https://www.factset.com/hubfs/Website/Resources%20Section/Research%20Desk/Earnings%20Insight/EarningsInsight_121721A.pdf