Global Portfolio Strategy | March 7, 2022

Key changes from February’s report:

  • Downgrading developed international equities to negative from neutral

Stocks fell in February, as the S&P 500 Index lost 3.3% for the month to bring the year-to-date decline to 8.2% as of February 28. Russia’s invasion of Ukraine weighed on sentiment, pushing oil prices sharply higher and adding to already sky-high inflation. The economic cost of the conflict for the United States will likely remain minimal, but for Europe the cost will be higher due to the continent’s greater reliance on Russian energy.

Amid the disheartening developments in Europe, some positives have emerged. The Federal Reserve will likely employ a go-slow approach to rate hikes, COVID-19 cases are plummeting, and earnings look good.

Despite the latest correction, we are sticking with our year-end 2022 S&P 500 Index fair value target range of 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. Primary risks beyond a widening conflict in Europe include stubbornly high inflation and rising interest rates.

Despite elevated volatility to start the year, LPL Research continues to believe that tactical investors should tilt portfolios in favor of stocks over bonds relative to their respective targets.

INVESTMENT TAKEAWAYS:

  • We expect solid economic and earnings growth to help U.S. stocks deliver solid gains in 2022. Despite the rough start to 2022, we believe the U.S. economic cycle is in its middle stages, leaving the chances of a solid year for stocks in 2022 quite high.
  • Our value and growth style views are neutral. Slowing economic growth, a flatter yield curve, and earnings trends are bullish for the growth style, but value stocks are attractively valued, and should benefit more from the economy’s reopening and the commodities boom.
  • Our market cap views are balanced. Small cap valuations have become relatively attractive and they are more insulated from potential economic weakness in Europe, but as the economic cycle matures, we would expect large caps to resume leadership.
  • We continue to recommend a slight underweight allocation to fixed income as higher rates may put some pressure on bond returns.
  • Although we’ve seen a move slightly higher in yields recently, reduction of Federal Reserve (Fed) policy support and a strengthening global recovery may push yields still higher in the months ahead.
  • As interest rates have moved off last year’s record lows, we no longer think a max underweight to Treasury securities is warranted. While yields may move modestly higher from current levels, the biggest moves may have already occurred.

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IMPORTANT DISCLOSURES

This material has been prepared for informational purposes only, and is not intended as specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors and they do not take into account the particular needs, investment objectives, tax and financial condition of any specific person. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing. Any economic forecasts set forth may not develop as predicted and are subject to change.

Stock investing involves risk including loss of principal. Because of their narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies. Value investments can perform differently from the market as a whole and can remain undervalued by the market for long periods of time. The prices of small and mid-cap stocks are generally more volatile than large cap stocks. Bonds are subject to market and interest rate risk if sold prior to maturity.

Bond values will decline as interest rates rise and bonds are subject to availability and change in price. Corporate bonds are considered higher risk than government bonds. Municipal bonds are subject to availability and change in price. Interest income may be subject to the alternative minimum tax. Municipal bonds are federally tax-free but other state and local taxes may apply. If sold prior to maturity, capital gains tax could apply. U.S. Treasuries may be considered “safe haven” investments but do carry some degree of risk including interest rate, credit, and market risk. Bond yields are subject to change. Certain call or special redemption features may exist which could impact yield. Mortgage backed securities are subject to credit, default, prepayment, extension, market and interest rate risk.

Credit Quality is one of the principal criteria for judging the investment quality of a bond or bond mutual fund. Credit ratings are published rankings based on detailed financial analyses by a credit bureau specifically as it relates to the bond issue’s ability to meet debt obligations. The highest rating is AAA, and the lowest is D. Securities with credit ratings of BBB and above are considered investment grade. Duration is a measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. It is expressed as a number of years.

Alternative investments may not be suitable for all investors and should be considered as an investment for the risk capital portion of the investor’s portfolio. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses.

Event driven strategies, such as merger arbitrage, consist of buying shares of the target company in a proposed merger and fully or partially hedging the exposure to the acquirer by shorting the stock of the acquiring company or other means. This strategy involves significant risk as events may not occur as planned and disruptions to a planned merger may result in significant loss to a hedged position.

Commodity-linked investments may be more volatile and less liquid than the underlying instruments or measures, and their value may be affected by the performance of the overall commodities baskets as well as weather, geopolitical events, and regulatory developments. The fast price swings in commodities and currencies will result in significant volatility in an investor’s holdings.

Investing in foreign and emerging markets securities involves special additional risks. These risks include, but are not limited to, currency risk, geopolitical risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

Earnings per share (EPS) is the portion of a company’s profit allocated to each outstanding share of common stock. EPS serves as an indicator of a company’s profitability. Earnings per share is generally considered to be the single most important variable in determining a share’s price. It is also a major component used to calculate the price-toearnings valuation ratio.

Gross Domestic Product (GDP) is the monetary value of all the finished goods and services produced within a country’s borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory.

All index data from FactSet.

Tracking # 1-05250974 (Exp. 03/23)

For a list of descriptions of the indexes referenced in this publication, please visit our website at lplresearch.com/definitions.

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