Stocks rose slightly in December, as the S&P 500 returned 4.5% for the month, bringing the 2021 return to nearly 29%. Stocks experienced volatility surrounding the Federal Reserve’s hawkish pivot and rapid spread of the COVID-19 Omicron variant, but a solid economic growth and earnings backdrop, mostly mild symptoms, and favorable seasonal trends helped buoy investor sentiment.
Our year-end 2022 S&P 500 fair value target range is 5,000-5,100 based on a price-to-earnings ratio (PE) of 21-21.5 and our 2023 earnings per share (EPS) estimate of $235. We expect the 10-year Treasury yield to end the year between 1.75%-2.0%. Primary risks include restrictions on economic activity from COVID-19 spread in the U.S., lockdowns in Europe, prolonged supply chain disruptions, elevated inflation, higher interest rates, and geopolitics.
Against this backdrop, we believe that tactical investors should tilt portfolios in favor of stocks over bonds relative to their respective targets.