Global equity markets finished lower for the week. In the U.S., the S&P 500 Index closed the week at a level of 4,398, representing a loss of 5.67%, while the Russell Midcap Index moved 6.04% lower last week. Meanwhile, the Russell 2000 Index, a measure of the Nation’s smallest publicly traded firms, returned -8.07% over the week. International equity performance were lower as developed, and emerging markets returned -2.08% and -1.04%, respectively. Finally, the 10-year U.S. Treasury yield moved higher, closing the week at 1.73%.
The shortened trading week that has just passed marked the beginning of the release of corporate earnings reports for the fourth quarter of 2021. As of 1/21/22, FactSet is reporting that 13% of the companies in the S&P 500 have reported actual results for the recently ended period. Within this initial group of companies, 78.5% of S&P 500 companies have reported a positive EPS surprise, and 70.8% have reported a positive revenue surprise. Additionally, FactSet is reporting that thus far, the blended earnings growth rate for the S&P 500 for the fourth quarter is 21.5%. FactSet projects, “Based on the 5-year average improvement in earnings growth during each earnings season due to companies reporting positive earnings surprises, it is likely the index will report earnings growth of nearly 30% for the fourth quarter, which would be the fourth consecutive quarter of (year-over-year) earnings growth at or above 25%.”
Projections and actual results from early reporting companies are only part of the earnings story. The other part is market reaction and investor sentiment. As positive and upbeat as the early results have been, market reaction and investor sentiment have been broadly negative for the initial weeks of 2022. This observation is supported by the direction of the major equity indices over the past week. For the companies that have not reported earnings growth, the market has been unforgiving, with certain market price declines of greater than 20%. Much of the market activity thus far has likely not been due to earnings releases but rather market participant reactions to the likelihood of more interest rate hikes in 2022 than originally believed. Such increases in interest rates could impact companies with greater degrees of leverage, notably in the information technology sector. Not surprisingly, the technology-laden NASDAQ Composite is currently suffering its worst month of performance since November 2008.
While investor sentiment and negative price movements should not be ignored, we believe that long-term shareholder value depends more on earnings growth and strong fundamentals. We will continue to monitor corporate earnings reports throughout this earnings season while also keeping track of any potential detours in the expected tightening path of the Federal Reserve.
When managing their investment portfolios, investors should consider all of the information and data discussed within this market update and many other factors. However, with so much data and so little time to digest it all, we encourage investors to work with experienced financial professionals to help process all of this information in order to build and manage the asset allocations within their portfolios consistent with their objectives, timeframe, and tolerance for risk.
Best wishes for the week ahead.
Quarterly Corporate Earnings data is sourced from FactSet. Equity Market and Fixed Income returns are from JP Morgan as of 1/21/22. Rates and Economic Calendar Data from Bloomberg as of 1/21/22. International developed markets measured by the MSCI EAFE Index, emerging markets measured by the MSCI EM Index, U.S. Large Cap defined by the S&P 500. Sector performance is measured using the GICS methodology.
Disclosures: Past performance does not guarantee future results. We have taken this information from sources that we believe to be reliable and accurate. Hennion and Walsh cannot guarantee the accuracy of said information and cannot be held liable. You cannot invest directly in an index. Diversification can help mitigate the risk and volatility in your portfolio but does not ensure a profit or guarantee against a loss.
Diversification can help mitigate the risk and volatility in your portfolio but does not ensure a profit or guarantee against loss.
Investing in commodities is not suitable for all investors. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity.
Products that invest in commodities may employ more complex strategies which may expose investors to additional risks.
Investing in fixed income securities involves certain risks such as market risk if sold prior to maturity and credit risk especially if investing in high yield bonds, which have lower ratings and are subject to greater volatility. All fixed income investments may be worth less than the original cost upon redemption or maturity. Bond Prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the value of your investment.
MSCI- EAFE: The Morgan Stanley Capital International Europe, Australasia and Far East Index, a free float-adjusted market capitalization index that is designed to measure developed-market equity performance, excluding the United States and Canada.
MSCI-Emerging Markets: The Morgan Stanley Capital International Emerging Market Index, is a free float-adjusted market capitalization index that is designed to measure the performance of global emerging markets of about 25 emerging economies.
Russell 3000: The Russell 3000 measures the performance of the 3000 largest US companies based on total market capitalization and represents about 98% of the investible US Equity market.
ML BOFA US Corp Mstr [Merill Lynch US Corporate Master]: The Merrill Lynch Corporate Master Market Index is a statistical composite tracking the performance of the entire US corporate bond market over time.
ML Muni Master [Merill Lynch US Corporate Master]: The Merrill Lynch Municipal Bond Master Index is a broad measure of the municipal fixed income market.
Investors cannot directly purchase any index.
LIBOR, London Interbank Offered Rate, is the rate of interest at which banks offer to lend money to one another in the wholesale money markets in London.
The Dow Jones Industrial Average is an unweighted index of 30 “blue-chip” industrial U.S. stocks.
The S&P Midcap 400 Index is a capitalization-weighted index measuring the performance of the mid-range sector of the U.S. stock market, and represents approximately 7% of the total market value of U.S. equities. Companies in the Index fall between S&P 500 Index and the S&P SmallCap 600 Index in size: between $1-4 billion.
DJ Equity REIT Index represents all publicly traded real estate investment trusts in the Dow Jones U.S. stock universe classified as Equity REITs according to the S&P Dow Jones Indices REIT Industry Classification Hierarchy. These companies are REITs that primarily own and operate income-producing real estate.