Some Optimistic Signs for the S&P 500 This Year

After the S&P 500 Index ($SPX) (SPY) last year posted its worst year in 14 years, there are some encouraging signs that the index may improve this year.  Positive factors include lower stock valuations, signs that China may recover from its Covid surge sooner than expected, and optimism that inflation may have peaked. 

U.S. corporate earnings estimates have already been significantly downgraded over the past few months, indicating that most of the bad news has been factored into earnings.  Data from Bloomberg Intelligence forecasts 2.2% growth in earnings in 2023, after 8% growth in 2022.  After initially falling during the first half of this year, Bloomberg Intelligence expects corporate profits will climb by an estimated 9.9% y/y in Q4 of this year.

Last year’s plunge in U.S. equity markets has taken the froth out of stock valuations.  The S&P 500 is trading at a 12-month blended forward P/E ratio of about 16.7 versus 21.4 at the end of 2021 and a 10-year average of about 17.3.  Also, mega-cap technology stocks have become cheaper.  Amazon.com is trading with a forward P/E of about 31, near the lowest since 2010.  In addition, Apple’s forward P/E has fallen to about 20 from about 30 a year ago. 

Stocks may also climb as China emerges from Covid lockdowns, improving the prospects for global economic growth.  There are hopes that the recent Covid surge in China may be easing, which will reduce supply chain issues and could lead to lower global inflation.  Eleven major Chinese cities reported a recovery in subway use in the past week, a sign that Covid infections may have already peaked.

Stocks should have support this year from a less-hawkish Fed, the return of corporate earnings growth, and more reasonable stock valuations.  However, a new energy shock or a jump in commodity prices this year from China’s reopening could boost inflation and keep the Fed on its hawkish path.  That would be a drag on high-valued technology stocks and weigh on the overall market, keeping a recovery in stocks this year in doubt. 

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