category: Market Commentary

Although markets do not always lead changing fundamentals, markets traded down ahead of weaker earnings in the first half of 2022.

Since the end of June, global equity flows have been negative and F23 earnings estimates for the S&P 500 are down 7%, yet the index has rallied more than 11%. We chalk the move up to two things.

Entering 2022, we highlighted the many risks facing investors this year, which then included stretched valuations, accelerating inflation and consequently, looming rate hikes.

Coming into 2022, prevailing wisdom held that strong household balance sheets and sustained reopening spending would be counterweights to rising interest rates at the Fed.

In April, the S&P 500 continued to edge toward a bear market, defined as a 20% drop from recent market highs; through May 11th the S&P had dropped 18% from its January 3, 2022 high.

Aside from the headline moves in Energy and Materials in the first quarter, which were tied to the war in Ukraine and to post-pandemic commodity supply challenges, the Canadian market has turned extremely defensive.

Russia’s invasion of Ukraine on February 24th marks one of those rare times in history where the world order appears upended. We would say overnight, but the conflict has been brewing since Russia invaded Crimea in 2014.

We’ve been asked a lot lately where we see markets heading through the end of 2022. No problem, we reply. We have just three questions. Where will the yield on 10-year U.S. Treasuries be at year end? Will current earnings expectations be met? And will investors’ relatively bullish sentiment hold up?