Moderating Earnings, Rising Rates, and the 2022 Stock Market

Will an earnings slow down and rising interest rates combine to tank the market? Here's our assessment Earnings Could Moderate While Interest Rates Rise – What It Means for Stocks A glance at the title of this week’s column may ring some alarm bells. If earnings are expected to moderate while interest rates (and inflation) rise, wouldn’t this pose some pretty stiff headwinds for stocks? I’ll expand on this question more below, but I think the short answer is: “yes and no.” Let’s first take a look at where Q4 2021 earnings stand as of early February.1 According to researchers at Zacks Investment Management, the picture emerging from the Q4 earnings season is one of continued strength and momentum. The proportion of companies beating consensus revenue estimates is tracking above what we saw from this group in the preceding earnings season, with earnings beats nearly the same. --------------------------------------------------------------- [What Does Rising Interest Rates & Volatility Mean for Your Investments?]( Rising interest rates could mean more volatility. And with it comes many more unknowns, but do you know there are still ways you can protect your investments? I want you to make the most out of your long-term returns. This requires thinking long-term and focusing on key data that can help guide your financial decision-making. To help you do this, I am offering all readers a look into our just-released February 2022 Stock Market Outlook report. This report will provide you with our forecasts along with additional factors to consider: - Zacks Rank S&P 500 Sector Picks - Zacks view on equity markets - What produces optimism in 2022?? - Zacks forecasts for 2022 - Zacks ranks industry tables - Sell-side and buy-side consensus - And much more If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today! [IT’S FREE. Download the Just-Released February 2022 Stock Market Outlook2]( --------------------------------------------------------------- Through early February, we had Q4 2021 results from 278 S&P 500 members, and total earnings were up +30.2% from the same period last year on +16% higher revenues. 78.4% of the companies reporting beat earnings-per-share and revenue estimates, pretty much in-line with longer-term averages. Projecting out over the next few weeks, total S&P 500 earnings for Q4 are expected to be up +25.6% from the same period last year on +14.1% higher revenues. These are solid prints, and are largely better-than-expected given the well-known headwinds of cost pressures, logistical bottlenecks, and the labor impact from the Omicron variant. If anything, the real struggle companies are facing is being able to keep up with a historically high-demand environment. Of course, these are all backward-looking figures, and what matters to stock prices in 2022 is where earnings are headed – not where they’ve been. And it’s plain to see in the chart below that the pace of earnings growth is set to decelerate in the coming quarters: Now I can revisit the question of rising interest rates and moderating earnings, and what it means for stocks. The basic premise investors need to understand is this: rising interest rates make future earnings less valuable. When risk-free bond yields (which I will refer to as the discount rate) are close to zero, investors will pay more for a company with high earnings and strong projected future earnings, i.e., growth stocks. This helps explain why many high-flying tech names trade at such high multiples. However, when the discount rate starts to rise, those future earnings are worthless to an investor. In the past few weeks, bond yields have risen to their highest level since 2019, which helps explain the concurrent sharp selloff in many high valuation stocks, particularly in the tech sector. If the discount rate is rising, and an overvalued company even hints at weaker-than-expected earnings, it probably spells trouble. Not all stocks necessarily feel the headwinds of a rising discount rate, however. Value stocks – which on a relative basis are cheap based on measures like book value and price-to-sales ratios, often look more attractive in a challenging rate and earnings environment. That’s why I think the task-at-hand for investors in 2022 is to review your portfolio for quality – to ensure you are not overcommitted to high growth, high valuation companies that may not be able to maintain the same earnings growth pace of previous years. After all, we know stocks have historically done very well early in rising rate environments – it’s just about knowing where the quality is. Bottom Line for Investors We remain positive in our earnings outlook for 2022, and we see the overall growth picture steadily improving particularly as labor issues associated with Omicron start to ease. Looking ahead, many reporting companies so far have offered reassuring, if not altogether positive guidance for the year. Interest rates are also on the rise, however, which means the future earnings of high valuation stocks will be looked at more critically. This environment could pose challenges for ‘growthy,’ high multiple corners of the market while making value companies look more attractive by comparison. In times like this, I recommend that investors focus on factors that can protect their investments for the long-term. To help, I am offering all readers our [Just-Released February 2022 Stock Market Outlook Report](. You’ll discover Zacks’ view on: - Zacks Rank S&P 500 Sector Picks - Zacks view on equity markets - What produces optimism in 2022? - Zacks forecasts for 2022 - Zacks ranks industry tables - Sell-side and buy-side consensus - And much more If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today! [FREE Download – Zacks' February 2022 Stock Market Outlook Report4]( About Zacks Investment Management Zacks Investment Management was born out of one of the country’s largest providers of independent research, Zacks Investment Research. Our independent research capabilities from our parent company truly distinguish us from other wealth management firms - our strategies are derived from research and innovation, including the proprietary Zacks Rank stock selection model, earnings surprise and estimate revision factors. At Zacks Investment Management, we work with clients with $500,000 or more to invest, and we use this independent research, 35+ years of investment management experience, and tools we’ve developed to design customized investment portfolios based on each client’s individual needs. The end result is investment management that is research driven, results oriented and client focused. [Let's Set Up a Talk]( Don't put off planning your secure, happy retirement! Get started today by talking to a Zacks Wealth Advisor. © Zacks Investment Management | [Privacy Policy]( 1[Zacks.com. 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