Macro Update

We now cast our eyes towards 2022, where many investors are concerned about the outlook for next year and wondering what will be in store for them in terms of return expectations.  

 

Some key takeaways are:

• Due to the supportive actions taken by governments around the world, we have seen a strong recovery from the pandemic lockdown, most of the earnings reported have surprised to the upside with strong earnings growth in 2021
• This environment will likely reverse in 2022, with earnings growth slowing and government ‘tapering’ or pausing many of the supportive measures in monetary and/or fiscal policies. However, this does not necessarily translate into a weak market outlook
• Given that both GDP as well as earnings growth for next year are forecasted for continued growth, albeit at a much more modest pace compared to this year, we still anticipate a favourable environment for equities

Economic Forecast

 

As Covid-19 continues to fade into the background, some of the supply chain constraints are anticipated to alleviate as operations begin to normalize. The main forecasts for global GDP growth are as follows:

Growth Outlook

Source: RBC Economics

 

Historically, at >4% GDP, US equities markets are strong and on average delivers 8% in return:

Source: RBC US Equity Strategy, Haver, S&P

 

We anticipate rates will rise overall and this can be seen as a headwind for the markets. However, the impact should be modest as the message has been well articulated by the Fed and now anticipated by the investment community. Equities also tend to do well in the first year of a rising interest rate environment as long as the overall economic growth is healthy.

 

Lastly, our U.S. business cycle scorecard indicates that the U.S. economy is likely in the early to mid-cycle and recession is not a worry in our forecasts.

Source: RBC GAM; data through 8/6/21

 

Q3 Earnings Update

Roughly 82% of S&P500 companies reported as of Oct 29 have beat their earnings per share (EPS) estimates. EPS growth has surprised positively by 12% and grew 34% year over year.

 

Percentage of S&P500 companies beating quarterly EPS and Sales estimates

Source: Bloomberg, JPM

 

S&P500 ESP Earnings Forecasts

Source: RBC US Equity Strategy

 

Our US Equity Strategies team forecasts 11% earnings growth for 2022 and 7% earnings growth for 2023 with revenue and margins expansion expectations. Our team is relatively conservative on the share buybacks assumptions, however we have not discounted any negative impact from potential increases in corporate taxation.

 

 

Rita Li works with individuals and business owners and healthcare professionals to provide tailored investment advice, risk management and financial planning. Her team comprises of professionals with in-depth taxation, insurance and legal expertise, together, they deliver a high standard of service to clients. Rita is a Chartered Financial Analyst CFA® and holds her MBA from Richard Ivey School of Business.