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State of the Markets Report: 2022 Forecasts

State of the Markets Report: 2022 Forecasts

February 10, 2022

In our 3-part State of the Markets Report, we've looked at some of the factors affecting market performance in 2021, where we are now, and the headwinds and tailwinds that could affect the direction of economic growth and financial markets in 2022. Now let's take a look at some 2022 forecasts.

Assets, Liabilities and Net Worth

We mentioned that a healthy consumer might be a tailwind for the market this year. Here’s why we think that could be the case. The share of GDP that comes from spending from within the U.S. is just a shade under 70%, which makes the financial health of the American consumer integral to economic growth.

This chart is an illustration of Americans’ balance sheets coming into the New Year. As you can see, assets owned by individuals have steadily risen since the depths of the pandemic in 2Q 2020 to a level that is now higher than pre-pandemic levels.

Meanwhile, consumer debt has stayed roughly the same through this same period, owing, in part, to government assistance programs throughout the pandemic period.

When taken together, Americans’ net worth has increased, which has put more spending power into the hands of consumers, which may lead to higher economic activity.

There is one other important element to increased spending, however, besides having the money to spend: confidence about the future. In the past two years, we have seen that consumers who lack confidence in the near-term health of the economy, or are concerned about the spread of COVID infections, are less likely to spend. Consumer confidence took a hit as 2021 came to a close, thanks to the Delta surge, accelerating inflation and the introduction of the Omicron variant.

Corporate Earnings

Corporate earnings will be another likely important determinant of stock market performance in 2022. After all, these are a key factor in determining stock valuations in the long run.

Overall, earnings in 2021 were strong, rebounding strongly from muted earnings during the pandemic months in 2020. As you can see from the chart, the third quarter was exceptionally strong, increasing 39.8%. Fourth-quarter 2021 earnings growth is expected to be over 20%.

These are big numbers that are not expected to be repeated.

In fact, earnings growth estimates are expected to narrow, with a 2022 calendar year growth rate of just under 9%. At first glance, this may seem like a headwind, rather than a tailwind, for the markets. But remember, markets are discounting mechanisms that look 6 to 9 months ahead. Today’s prices reflect the 2022 forecast for corporate earnings growth. However, a strong economy in 2022 could lay the groundwork for positive earnings surprises in 2022.

It’s important to remember that forecasts or forward-looking statements are based on assumptions, subject to revision without notice, and may not materialize. And if we’ve learned anything during the past couple of years, it’s that the outlook for financial markets can change quickly.


Inflation is an important economic indicator; rising prices impact the entire economy. Too much inflation can hinder growth, while too little inflation can be a sign of economic weakness.

As this chart illustrates, inflation took a sharp turn higher last year from the norms of recent decades. The strong rebound from the pandemic-induced recession, coupled with labor shortages and supply chain bottlenecks, caused the prices of many goods and services to jump. Some economists also point to the combination of fiscal spending and accommodative monetary policy as contributing factors to the acceleration of inflation.

Whatever the reason, inflation has accelerated at a faster pace and persisted for much longer than originally anticipated by the Federal Reserve. Fed Chair Powell has admitted as much. Despite this admission, Powell still believes inflation will recede in 2022, and the market has largely accepted this inflation narrative. While unclogging the supply chain pipes will be a key development in 2022 to moderate inflation, wage growth pressures are likely to persist as a driver of continued inflation in this new year.

We also included the rise in producer prices because they can indicate future increases in consumer prices since businesses often pass on some or all of their price increases to the consumer.

Inflation may have a major influence on the performance of financial markets in 2022, since it could force the Fed to quicken the pace of its bond tapering program and change its plans for interest rates. In each instance, the Fed’s actions may impact bond yields and stock prices. Even if the Fed sticks to its schedule for tapering and interest rate hikes, the bond market may not sit idly by. Bond investors may demand higher yields to offset rising inflation, the effects of which could ripple into the stock market, especially among high valuation companies.


During the past two years, there has been no greater influence on the stock market, at least on a short-term basis, than COVID-19.

Increases in infections raise the prospect of economic restrictions, causing temporary sell-offs, while declines in infections or new treatments buoy investor sentiment. With the emergence of Omicron and the prospect of an uptick of new infections, investors will be particularly sensitive to how well this risk is managed.

As this chart indicates, we’ve seen defined surges of infections, the initial one in 2020 and that of the Delta variant in the third quarter of 2021. Of course, no one can predict the course of COVID-19 infections moving forward, but we have seen that markets get nervous when they spike.

GDP and Unemployment

Economic forecasters surveyed by the Philadelphia Fed are painting a generally improving economy. While they have trimmed their GDP growth estimates for the final quarter of 2021 and the first quarter of 2022, they are projecting stronger growth in the second half of 2022 than originally anticipated. On the labor front, they are very optimistic, calling for declining unemployment rates throughout the year and at a much faster pace than they had earlier predicted.

Unemployment and Wages

The labor market continued to strengthen over the course of 2021, with unemployment falling and wage growth accelerating. As we saw in the previous slide, unemployment is expected to fall further as the economy expands. A healthy employment picture has historically augured well for the economy.

While wage growth is generally a positive development for the economy, it should be noted that this upswing in wages has been offset by a faster rise in prices, leaving many workers with lower spending power despite the strong wage growth.

S&P 500

So, what are the experts forecasting for domestic equities in 2022?

On average, they are expecting a modest gain from the 2021 close. The forecast reflects the belief that stocks are unlikely to repeat their outsize gains of 2021, as well as some headwinds that may impact corporate earnings and economic growth, such as inflation, supply chain disruptions, and the potential for new COVID-19 variants. Within this average forecast for modest returns is a broad range of estimates, from a flat or slight decline to a much healthier gain.

Of course, no one knows for sure what equities will do in 2022, and predictions at this stage are just that – predictions. However, these analysts’ perspectives show that, for the most part, Wall Street is guardedly optimistic.

Like other images in this presentation, this image includes a forecast, so it’s important to remember that forecasts are based on assumptions and are subject to revisions over time. Financial, economic, political, regulatory, and, in this instance, health issues may cause the actual results to differ from the expectations expressed in the forecast.

Investment Discipline

We’ve covered a lot of information, focusing most of our discussion on what drove the market and what we expect to move the market over a short period. However, as we know, what can sometimes get lost with a short-term focus on the market is a consideration of the long-term.

This chart illustrates the value of investment discipline. Since 1950, we can see that the one-year range of returns for stocks is quite wide, with yearly gains of up to 47% and yearly losses of up to 39%. As represented by the purple bar, Bonds have a much narrower performance, ranging from +43% to -8%.

Finally, we see a hypothetical balanced portfolio of 50% stocks and 50% bonds in which there are lower highs and higher lows.

If we follow the performance of these three portfolios during the 5-, 10-, and 20-year rolling periods since 1950, we see the range of returns narrows. In short, a balanced portfolio can help manage overall risk.

The precise allocation among different asset classes will vary from one investor to another depending upon their individual goals, time horizon, and risk tolerance. Asset allocation is an approach to help manage investment risk. Asset allocation does not guarantee against investment loss.

In this illustration, stocks are represented by the S&P 500 Composite Index, which is an unmanaged index that is considered representative of the overall U.S. stock market. Bonds are represented by the Strategas/Ibbotson Index for the periods from 1950 to 2010 and the Bloomberg Aggregate index from 2010 to 2020.

Index performance is not indicative of the past performance of a particular investment. Past performance does not guarantee future results. Individuals cannot invest directly in an index. The return and principal value of stock prices will fluctuate as market conditions change. And shares, when sold, may be worth more or less than their original cost.

Action Items for 2022

What can you do in 2022 to move closer to your goals? Here are some action items for you:

If your life or personal situation changes, keep us in the loop. We want to hear about important family events, like births and deaths.

We also care about health issues, employment changes, and any financial developments that may change your situation. And if you find yourself thinking about new goals or reevaluating your priorities, share your thoughts with us, so we can help you pursue the life you most desire.

On top of specific adjustments in your financial life, we also want to know how you feel about investment changes. These could be details like a shift in your risk tolerance or any concerns about the market environment.

Finally, remember to go over your estate documents, beneficiary designations, and other paperwork to make sure they’re all up-to-date. A well-organized estate is one of the best gifts you can give to your family.

We’re here to talk through whatever financial questions or worries you may have. Our priority is always to help you make informed choices and stay on track.