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In this edition of LPL Market Signals, LPL Financial strategists Jeffrey Buchbinder and Quincy Krosby discuss prospects for a potential strong second half rebound for 2022, LPL’s lowered year-end fair value target on the S&P 500 Index, and the latest inflation reading.

The strategists note that while the first half of 2022 was terrible for markets, with the S&P 500 down about 20% after a 16% second quarter drop, stocks have historically bounced back strongly after such downturns. Historically, after the S&P 500 drops 15% or more in a quarter, the index has gained an average of 6.2% the next quarter, 15.2% the following two quarters, and 26.1% the following year. Stocks have also historically bounced back strongly after bad halves, with an average gain of 8.5% the next quarter, 21.5% the following two quarters, and 31.4% the following year.

The strategists also discussed the decision by LPL Research to lower its year-end fair value S&P 500 Index target. The move was a valuation call, reflecting higher interest rates and troublesome inflation, and not a call for incremental earnings weakness. The new target of 4,300 to 4,400, which still allows for potential double-digit gains from current levels through year-end, is based on a price-to-earnings ratio (P/E) of 18-19 and a $235 S&P 500 earnings per share forecast for 2023. The strategists expect a growing economy and solid earnings gains in the second half to fuel higher stock prices, though gains will likely be back-end loaded given the time it will take for inflation to come down enough for the Federal Reserve (Fed) to signal a pause.

Finally, the strategists discuss the latest inflation data—the core personal consumption expenditure (PCE) price index—which has improved, but not enough for markets to begin to confidently price in a prompt conclusion to the Fed’s rate hiking campaign. High non-core prices (food and energy), along with high prices of travel-related categories and tight labor markets remain worrisome for the Fed.

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Listen to the entire podcast to get the LPL strategists’ views and insights on current market trends in the U.S. and global economies. To listen to previous podcasts go to Market Signals podcast. You can subscribe to Market Signals on iTunes, Google Podcasts, or Spotify and find us on the LPL Research YouTube channel.

 

IMPORTANT DISCLOSURES

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth in the podcast may not develop as predicted and are subject to change.

References to markets, asset classes, and sectors are generally regarding the corresponding market index. All indexes are unmanaged and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

Stock investing includes risks, including fluctuating prices and loss of principal. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

The Standard and Poor's 500, or simply the S&P 500, is a stock market index tracking the performance of 500 large companies listed on stock exchanges in the United States.

The Bloomberg U.S. Aggregate Bond Index, or the Agg, is a broad base, market capitalization-weighted bond market index representing intermediate term investment grade bonds traded in the United States.

All index data is from FactSet.

The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.

Core CPI is a subset of the total Consumer Price Index (CPI) that excludes the highly volatile food and energy prices. It is released by the Bureau of Labor Statistics around the middle of each month. Compare to Personal Consumption Expenditures (PCE); Core PPI; Producer Price Index (PPI).

Personal consumption expenditures (PCE) is a measure of price changes in consumer goods and services released monthly by the Bureau of Economic Analysis (BEA). Personal consumption expenditures consist of the actual and imputed expenditures of households; the measure includes data pertaining to durables, nondurables, and services. It is essentially a measure of goods and services targeted toward individuals and consumed by individuals.

All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

This Research material was prepared by LPL Financial, LLC. 

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