2022 Outlook: Positioning among the peaks

By Michael W Arone, CFA, Chief Investment Strategist

With better therapeutics, increasing vaccination rates and greater deployment of diagnostic testing, investors have begun to look cautiously beyond the pandemic. Vaccinating young children and the possibility of treating COVID-19 with a pill are major breakthroughs.

While COVID-19 may be a persistent menace, it is expected that the negative social and economic impacts will continue to fade in 2022.

It appears that fiscal stimulus from December 2020’s $900 billion Consolidated Appropriations Act and March’s $1.9 trillion American Rescue Plan Act strengthened the economy in the first half of 2021. And in November, President Joe Biden signed the more than $1 trillion bipartisan Infrastructure Investment and Jobs Act, potentially further aiding the economy’s pandemic recovery.

Less than a week later, the US House of Representatives passed the $2.2 trillion Build Back Better Act along party lines. The bill faces a more difficult path in the US Senate. Extraordinary fiscal spending may reinforce the economy’s rebound in 2022.

Fed Policy

The Federal Reserve (Fed) has also done its part to keep the economy and markets humming. The Fed has increased its balance sheet by $1.4 trillion to $8.7 trillion so far in 2021.1

At the same time, the Fed has kept the target federal funds rate pegged at 0 to 1/4 percent all year. Although the Fed announced plans in early November to begin tapering the pace of its asset purchases by $15 billion a month, its balance sheet is still expanding, but at a decelerating rate.

And, most market participants don’t expect the Fed to begin raising rates until the second half of 2022. Easy monetary policy may continue to be a tailwind for risk assets for at least the first half of the year.

While progress in defeating COVID-19, huge fiscal spending and accommodative monetary policy have been a wonderful supporting cast, phenomenal corporate earnings results appear to have been the primary driver of stock market returns.

Earnings Outlook

According to FactSet, analysts are forecasting S&P 500 earnings growth of more than 40% for 2021. This unusually high growth rate seems to be due to a combination of higher earnings and easier comparisons to lower earnings from 2020 due to the negative impact of COVID-19 on a number of industries.

Both the breadth and magnitude of companies beating rising earnings expectations has been impressive. An encore earnings performance isn’t likely, in my opinion. However, Factset analysts are still expecting solid S&P 500 earnings growth of 8.7% on revenue growth of 7.1% for calendar year 2022.2

Should actual earnings and revenue growth results come close to those forecasts, it would presumably be enough to propel stocks higher in the new year.

Risks Mount

As the bull market transitions from 2021 to 2022, a number of risks need to be carefully monitored. Supply chain disruptions across four dimensions — products (autos, semiconductors), transportation (shipping containers, trucking), labor shortages and energy shortfalls — continue to be a challenge for the global economy.

Bottlenecks have contributed to higher and more persistent inflation than most market observers and central bankers had been expecting.

Rising inflation presents other potential risks for the global economy. Surging food and energy prices can be especially challenging for poorer nations and lower income families. As a result, geopolitical risks may be climbing. In the US, divisive budget, debt ceiling and Build Back Better negotiations will take place under the shadow of looming midterm elections in November 2022.

Complications in cleanly exiting the pandemic make determining whether inflation is truly transitory or more permanent nearly impossible. If central banks are already behind the inflation curve, as some economists suggest, they will need to accelerate monetary policy tightening to curb building inflationary pressures.

However, if central banks prematurely tighten monetary policy, they risk curtailing already fragile global economic growth. Investors may not be not well prepared for this potential outcome.

Finally, despite all the progress made in 2021, COVID-19 risks and headlines are unshakable. Austria went into a major lockdown in late November to try to break the strong fourth wave of COVID-19 spreading across Europe. Germany is also considering more COVID-19 restrictions and even a full or partial lockdown.

And the omicron variant discovered in South Africa has already prompted new travel restrictions. Pandemic risks seemfleeting, but they have yet to be eliminated.


With the S&P 500 Index closing at an all-time high more than 68 times so far in 2021,3 it would be natural for investors to conclude that our outlook focuses on a peak in stock market levels — perhaps forecasting more modest returns or even a major stock market correction in the coming year.

But that’s not the peak our outlook addresses. Our outlook seeks to help investors to deliberately maneuver among the peaks in valuations, supply chain disruptions, inflation and fiscal and monetary policy.

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Photo Credit: remykennyl via Flickr Creative Commons


1 Board of Governors of the Federal Reserve System, “Credit and Liquidity Programs and the Balance Sheet,” November 15, 2021.

2 FactSet, Earnings Insight, November 19, 2021.

3 Bloomberg Finance, L.P. as of November 19, 2021.


The views expressed in this material are the views of Michael Arone through the period ended December 31, 2021 and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.

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