It's been a brutal first half of 2022 for investors, with the SPDR S&P 500 ETF Trust (NYSE:SPY) down 20% year-to-date. Fortunately, Comerica Wealth Management just released its Mid-Year Market Outlook report, and chief investment officer John Lynch is predicting the S&P 500 will recover a significant portion of its early-year losses by the beginning of 2023.
Volatile First Half: In the report, Lynch said ongoing COVID-19 lockdowns in China and the surprise Russian invasion of Ukraine threw investors and economists some major curveballs in the first half of 2022. As a result, the Federal Reserve has not been able to dial back inflation the way that it had previously hoped, and Lynch said tightening monetary policy has become a significant headwind for the S&P 500.
Related Link: Midyear Market Outlook: Where Is The Economy Headed From Here?
U.S. GDP dropped 1.5% in the first quarter, and some economists are concerned the economy dropped into a recession in the second quarter. However, Comerica economists are still projecting full-year U.S. GDP growth of 2.8% in 2022 and 1.7% in 2023.
Lynch said fixed income markets appear to be settling down after a turbulent start to the year. He said 10-year U.S. Treasury yields seem to be forming a base in the 2.75% to 3.25% range.
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S&P 500 Outlook: Turning to the stock market, Lynch said the 2022 pullback had dealt severe technical damage to the S&P 500. Still, he is optimistic the worst of the 2022 sell-off is in the rearview mirror.
"Our below consensus profit forecasts suggest the S&P 500 Index will be fairly valued in the 4,000 to 4,250 range by year-end. We maintain our preference for value, quality (profitable) small caps, and cyclical sectors including Energy, Materials, Industrials, and Financials," Lynch said.
Benzinga's Take: The S&P 500 is looking increasingly cheap, trading at a forward earnings multiple of just 15.8. However, if the U.S. drops into a recession, consensus earnings estimates will start to fall quickly and stocks may not be as cheap as they appear from a fundamental standpoint.
