After a stellar 2021, stocks head into 2022 with a tailwind. However, the course of the market in the new year will depend more on solid earnings growth and a strong economy than a super easy Federal Reserve.
The S&P 500 rose 27% to 4,766 last year, notching 70 record closing highs. The benchmark outpaced the 19% gain in the Dow Jones Industrial Average and the 21% rise in the Nasdaq Composite.
The employment report is the most important data, as it also includes the ISM manufacturing survey data and auto sales, both slated for Tuesday. International trade data will be released on Thursday. Traders now expect 405,000 jobs were added in December, up from 210,000 in November. The unemployment rate is expected to slide to 4.1% from 4.2%.
The 2021 market was bifurcated with an initial surge in some high-flying growth stocks, but then many of those names fell hard, and some of the big-cap names in the S&P 500 turned in super-charged performances. Microsoft was up 51% for the year, while Apple gained 34%. Home Depot was up 56%, and American Express gained 35%. Ford was up 136%.
On Wednesday, the Fed will release minutes from its December meeting. Following that meeting, the central bank announced it would speed up the tapering of its once $120 billion a month bond-buying program, now ending it by March instead of June. The March meeting is now viewed as the first opportunity for the Fed to move on a rate hike. The Fed has forecast three for 2022.
The market now foresees 2022 to be choppier for the stock market, as the Fed ends its bond purchases and moves to raise interest rates from zero. The impact of tightening policy will be felt globally, as other central banks also reduce their asset purchase programs and move toward raising interest rates.
Strong corporate earnings also boosted US stocks, the estimated year-over-year earnings growth rate for 2021 is 45.1%, according to FactSet data. That would mark the highest annual earnings growth rate for the index since FactSet began tracking the metric in 2008.
The economic and earnings rebound that started in 2020 carried over into 2021, lifting equity markets to record highs. While returns in 2020 were driven by price-to-earnings multiple expansion, returns in 2021 were driven by earnings growth. We believe the story in 2022 will be focused on value again as most of the stocks are very expensive at this moment.