WHAT IS THE EQUITY MARKET OUTLOOK FOR THE REST OF 2022?

18.07.2022 The sharp fall in the oil price, over the last month, suggests there is a good chance that a peak in US inflation is in place. Below we look at the implications for the equity markets.

Equity markets, and growth shares in particular, experienced a torrid first half of 2022. Shares were pressured by a series of aggressive rate hikes by the United States central bank. This was in response to a succession of very high inflation readings. For example, the annual American inflation rate in June 2022 registered 9.1%. However, in the last month the oil price has fallen by around twenty percent. This combined with slowing goods price inflation suggests that there is a good chance that US inflation has now peaked.

The current valuations of equity markets, and the ratings attributed to growth shares, are now a lot more reasonable than at the beginning of the year. However, markets still have to price in the impact of slower economic growth, due to higher interest rates, and slower profits growth. At present the economic data is pointing to an economic slowdown rather than a significant economic downturn. So far, economies have proved resilient to high inflation and higher interest rates. Savings accumulated during the various lockdowns, and faster wage growth reflecting tight labour markets, have certainly helped.

As annual inflation peaks and begins to fall back this should give central banks the opportunity to pause the cycle of interest rate rises early next year. A pause, combined with slowing economic growth, suggests that markets will conclude that ‘the next move (for interest rates) is down’. This would likely prompt a significant rally in equity markets. Very high global fund manager average portfolio cash balances, the highest since 2001 according to the July 22 Bank of America Merrill Lynch survey, can be expected to drive the next upturn in stock markets.

For information only. Investors should seek professional advice for their own circumstances before making an investment.

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This post was written by Robin