People get tested for Covid-19 at a testing site in Washington, DC on December 29, 2021. Photo: AFP / FILE

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People get tested for Covid-19 at a testing site in Washington, DC on December 29, 2021. Photo: AFP / FILE

U.S. corporate earnings growth set to slow next year after a 2021 gangbuster, with rising inflation and a rapidly spreading variant of Covid-19 adding to uncertainty as investors try to justify stock prices trading near record highs.

The S&P 500 is set to rise around 24% this year, and the index’s price / earnings ratio is well above its long-term average, raising fears the market is overbought. .

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According to IBES data from Refinitiv, profits for the S&P 500 are expected to increase by around 8% in 2022 after an estimated jump of 50% this year, when companies rebounded from the lockdowns and recession at the start of the pandemic.

Wall Street’s 2022 consensus estimates have changed little in recent weeks, even as stock indexes have lost ground amid concerns about how quickly the Omicron variant is spreading.

“We are entering an environment where we are likely going to go from multiple expansion to multiple compression,” said Robert Phipps, director of Per Stirling Capital Management in Austin, Texas, referring to rising profits for a company but not during its action. follow suit, leaving investors with little rewards.

The S&P 500’s forward price-to-earnings ratio is 21.5, compared to its long-term average of 15.5, according to Refinitiv DataStream.

A key factor that has helped prop up valuations has been ultra-low interest rates, which are likely to change now that the Federal Reserve is increasingly hawkish with rising inflation fears, Phipps said.

Rising interest rates increase borrowing costs for businesses and consumers, while higher rates can also lower stock market multiples, especially for tech and other growth stocks.

The tightening labor market and strengthening economy prompted the Fed last week to announce it would end its bond purchases during the pandemic in March. This could open the door to an interest rate hike of three-quarters of a percentage point by the end of 2022.

Fed policymakers also forecast inflation to hit 2.6% next year, above the 2.2% forecast in September.

At the same time, companies are still grappling with supply disruptions due to the pandemic, which appears to be entering a new heightened phase as Omicron cases increase across the world.

The possibility of faster spread and new restrictions was looming in some countries ahead of the holidays. Since the start of the month, Covid cases in the United States have increased by 50%, according to a Reuters tally.

“There are a lot of things that can go wrong,” said Christopher Harvey, head of US equity strategy at Wells Fargo Securities, who predicts an increased chance of a market decline of about 10% by the time. ‘next summer.

US companies have been successful this year in maintaining profit margins because they have reduced costs and passed on high prices to their customers.

However, it is not known to what extent the latest risks will alter the estimates and earnings results for 2022.

Estimated earnings growth for the S&P 500 in 2022 was 8.3% on Friday, down from 8.0% in early December, according to data from Refinitiv.

“Earnings estimates go up in December, so Omicron isn’t even factored into the estimates at this point,” said Nick Raich, CEO of independent research firm The Earnings Scout.