Here’s where the S&P 500’s rise will likely come from in 2022


The S&P 500 is having a whole different year after its strong performance in 2021. This is undoubtedly due to the sharp rebound in BPA expectations in 2021 for the 500 companies that make up this market benchmark, which also serves as a proxy for market valuation. . At the start of the week, this market barometer is trading at around 21.3 times the futures EPS expectations of $ 223.48, a few valuation points above the 19.1 average at which the S&P 500 peaked during the period 2000-2020. There were a few years that peaked considerably higher, such as the 27.1x of 2020, but we also have to consider that the S&P 500’s EPS for that year was shaken by the impact of Covid.

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Looking at this 2022 EPS forecast of $ 223.48, it depends on a continued recovery in the first half of 2022, followed by more moderate EPS growth in the second half. The forecast for the first half of 2022, a period in which positive GDP is expected despite what should be at least some lingering effects of the Omicron variant, are reasonable, but we could see revisions emerge for the current quarter. We’ll have a much better idea if that’s likely when we get December PMI data from ISM and Markit Economics next week.

Here’s the thing, with the market multiple near historical average highs, and a Fed likely to start removing the punch bowl in 2022 for the market to move higher, the edge in the S&P 500 is more likely. to come from EPS growth than multiple expansion. Can multiple extension occur? Of course, there is room for that, but to see a significant rise we will need to see real EPS growth.

I say in large part because a number of companies in recent weeks, including Stanley Black & Decker (SWK), Johnson Controls (JCI), Zoetis (ZTS) and a host of others have announced plans to repurchase d ‘shares on the rise. According to S&P Global Market Intelligence, there was $ 3.78 trillion in cash and cash equivalents on hand from aggregate S&P 500 companies, up 11% year-over-year.

What Bob Lang, the folks at Action Alerts Plus and I are going to focus on is growing its operating profit and expanding its operating margin, both of which are high enough on the income statement. of a business so that they not only show the operating leverage of the current business, they also don’t feel the impact of buyouts and sky-high tax rates. And for those wondering if I’ve seen companies report higher EPS year-over-year despite declining year-over-year operating profit, the answer is a “yes.” Resounding! And my response to that is “no thanks, please.”

(This comment originally appeared on Real Money Pro on December 27. Click here to learn more about this dynamic market information service for active traders and to receive Doug Kass’s Daily planner and columns of Paul Price, Bret jensen and others.)

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