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Why 2022 Markets Could Be Challenging

Earnings for the third quarter have been stellar, but growth in the next quarter could be challenging, argues Real Money Pro’s Bret Jensen.

Earnings for the third quarter have been stellar, but growth in the next quarter could be challenging, argues Real Money Pro’s Bret Jensen.

Over half of the companies in the S&P 500 have reported their third quarter earnings and their results have “largely have exceeded expectations,” he wrote in a recent Real Money Pro column.

“More S&P 500 companies are beating earnings estimates for the third quarter than average (82% versus the historical average of 76%) and beating these estimates by a wider margin than average as well,” Jensen wrote in the piece. “The index is tracking to the third-highest year-over-year growth in earnings since the second quarter of 2010, when the nation was recovering from the financial crisis.

Investors should not expect the same gains in the fourth quarter, Jensen argues.

“Companies this year were going up against pandemic-impacted 2020 results, but that won't be the case in 2022,” he wrote. “Not surprisingly, given the rise in commodity prices in 2021, the energy and basic materials sectors have led the way when it comes to earnings growth in the third quarter. While 2021 has been a good one for investors, the slogging will get tougher from here. Earnings comparisons in 2022 will be much more of a challenge than this year.”

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A slowdown in the economy could impact the stock market. Whether equities continue to climb for the fourth quarter will depend partly on how much GDP rises. Supply chain bottlenecks, the surge in inflation and labor shortages could easily lower the current projections of 6.6% growth from the Atlanta Fed for the fourth quarter.

Unlike software companies such as Microsoft   (MSFT) - Get Microsoft Corporation Report and Alphabet  (GOOGL) - Get Alphabet Inc. Class A Report, other sectors that deliver physical goods will run into headwinds as supplies are more expensive and the supply chain disruptions continue, Jensen wrote. Consumer spending is likely to slow down as gasoline prices and rent have risen and interest rates will probably increase in the future.

“All in all, investors should be grateful for a more-than-solid 2021 while realizing that the coming year is likely to be much more challenging and should prepare accordingly,” Jensen argues.

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