2021 looks to finish on a sigh rather than bang

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Markets reaction to Omicron and holiday travel

Large cap equities have largely remained in a consolidation range for the last two months of the year. The S&P 500 made another all-time high last week but the index looks to go out with a exhausted sigh, perhaps reflecting the US investor feelings around Omicron headlines and holiday travel disruptions.

A consolidation after the rocket like rise earlier in 2021 has allowed for valuations to stabilize and perhaps even approach more historically normal levels for a low interest rate environment. The five-year average forward P/E for the S&P 500 Index is 19.4X, about 13% lower than the current P/E. The market is still richly valued but that doesn’t mean that stock prices must decline. They only must increase less than earnings growth, allowing valuations to compress. Valuations are approaching levels where investors have historically been willing to pay for the promise of future US profits.

One positive for 2022 is that profit expectations have been steadily rising for the past two months. The 2022 S&P 500 expected profit growth has risen to 8.4%, even as analysts revise for inflationary pressures and interest rate increases. The expected profit growth is similar to growth achieved from 2012 to 2014, all years where US equity indexes returned handsome price increases. We look forward to guiding our investors through the next year.

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