The 2022 outlook for stocks

David Joy, Chief Market Strategist – Ameriprise Financial

Person holding phone showing stock market on the screen

David Joy, Chief Market Strategist – Ameriprise Financial

The outlook for stocks in the year ahead remains constructive, but not without a series of challenges. Importantly:

  • Economic growth is expected to remain healthy.
  • Both consumer and corporate balance sheets are in good shape.
  • Job growth remains strong.
  • The lagged effects of both fiscal and monetary stimulus will remain a support.

As a result, corporate earnings are expected to grow, although at a reduced pace more in line with their long-term historical average. Supply chain disruptions should improve slowly throughout the year, and ample pricing power is allowing many companies to maintain their profit margins. That could translate into stock returns that are also in line with longer-term averages, in our view, in the upper single-digit range. Fixed income total returns are expected to be more muted, as modestly rising interest rates pressure bond prices.


3 areas of challenge

Among the challenges that stocks will have to overcome is a shifting policy outlook in Washington. In response to higher inflation and an improving labor market, the Federal Reserve has already begun a pivot toward a less accommodative stance. And policy is poised to tighten in 2022, with the Fed indicating the possibility of three quarter-point interest rate hikes.

Fiscal policy is also likely to be far less stimulative. Following fiscal years 2020 and 2021 — when the federal budget deficit was 15% and 13% of GDP, respectively — the deficit is expected to fall below 5% of GDP in fiscal 2022. Likewise, the outlook for spending has been diminished by the uncertain future of the Build Back Better bill.

The COVID-19 pandemic continues to present its own challenge. The highly transmissible Omicron variant is spreading rapidly at the same time the Delta variant has been resurgent in a number of countries. New travel restrictions are beginning, as are lockdowns in some instances. The severity of the economic headwind for the services economy, especially the travel sector, is unclear. The potential burden on the health care industry is also uncertain.

This is also a mid-term election year. Historically, while stock returns over time have been positive on average, during a mid-term election year, they have also been the lowest of the four corresponding years of a presidential term. History also indicates that market volatility typically begins to rise during the summer months as the election increasingly comes into focus. The good news is that markets typically enjoy above-average returns in the 12 months following mid-term elections.


Key considerations for investors

Given the uncertainties, investors may want to consider making some more defensive-minded changes within their portfolios. For example:

  • This may be a good time to consider rebalancing. After the outsized gains of the past 12 months, the equity portion of your portfolio may have grown beyond your risk tolerance parameters.
  • A balanced sector exposure may also lend some additional stability to a portfolio that may have become too concentrated.
  • Dividend-paying stocks may also be attractive in a more challenging environment, as may stocks with high quality factor characteristics.
  • We also recommend international diversification where, in some instances, equity valuations are less challenging than in the United States.
  • For fixed-income investors, inflation protected and floating rate instruments may be appropriate.
  • And for both stock and bond investors, alternative strategies that provide both a hedge and additional flexibility might be considered.

If you have questions about the 2022 market outlook or current conditions, consider a review with your Ameriprise financial advisor. They are committed to providing personalized recommendations that support your financial goals and investment objectives.