Sticking to Our Targets, For Now

Late last year we unveiled our stock market forecast for 2022, projecting the S&P 500 would rise to 5,250 and the Dow Jones Industrials average would climb to 40,000. Since then, however, equities have dropped, with (now realized) fears about Russia invading Ukraine and the recognition that inflation is a more persistent problem than the Federal Reserve had previously let on, which means some combination of faster rate hikes or a higher ultimate peak for short-term interest rates, or both.

Reaching our year-end equity targets would now take a steeper climb than we previously thought: 20.7% for the S&P 500 and 17.4% for the DJIA, from Friday's close. But we still like those targets and don't see enough reason to change them.

As we wrote last week, Russia would likely invade Ukraine by soon after the Olympics ended, but that such an invasion is unlikely to change the long-term outlook for corporate profits. As a result, any drop in equities would end up being a buying opportunity.

Sure, the Biden Administration might try to exert pressure on Russia through economic and financial sanctions. But other countries, like China and Germany, have strong interests in continuing to exchange freely with Russia. Ultimately, right or wrong, we think the Biden Administration is more concerned about managing its image involving the Russia-Ukraine conflict, for purposes of domestic politics (like, not "appearing weak"), than trying to alter the outcome of the conflict itself.

Meanwhile, and for the time being, inflation is likely to be equities' friend, not their foe. Companies with pricing power, commodities' companies, and materials' firms, in particular, should do well.