It’s been a rough few weeks for the stock market. Fears of rising rates and the Federal Reserve pulling back its stimulus more aggressively than previously anticipated to fight high inflation have caused most of the market jitters, though earnings season—albeit in the very early stages—hasn’t helped either. The pain has been particularly acute for the many growth stocks that make up the Nasdaq Composite, which has corrected 14% from its November 2021 high. This is the third worst start to a year ever for the Nasdaq (down 10% year to date), though it was positive the rest of the month, the last five times it was down 5% or more year to date through January 20.

 Small caps have been hit even harder, with the Russell 2000 Index nearly in bear market territory with its 18% decline since November 8, 2021—though the higher quality S&P 600 small cap index has fared better in losing 12% during this period.

      WHAT MIGHT GET THIS MARKET TURNED AROUND?

Stabilization in interest rates would help. The 10-year Treasury yield’s inability to break through 1.9% last week and subsequent dip below 1.8% is a good start. Stock valuations are interest rate sensitive and harder to justify if bond yields go much higher (the price-to-earnings ratio for the S&P 500 using the 2022 consensus estimate for earnings per share is currently a touch below 20). On inflation, clearly a key risk for markets right now, the data likely won’t change much in January when it’s reported in February. However, we could soon see more evidence of easing supply chain bottlenecks and more people jumping into the workforce as COVID-19 disruptions hopefully fade.

When the market begins to gain more confidence that inflation will start coming down, hopefully as winter turns to spring, inflation may turn from stock market detractor to a contributor. A Fed meeting this week without any negative surprises would also help. Stable or lower oil prices would help as well.

LPL leans toward the rest of earnings season providing some support for stocks for these reasons:

· Despite these challenges, with about 70 S&P 500 constituents having reported, index earnings are still tracking to 5% upside, in line with the long-term historical average.

 · Profit margin assumptions baked into analysts’ estimates appear to reflect these challenges, increasing the likelihood of mostly positive market reactions to results.

· Despite a likely smaller upside surprise than in recent quarters, an earnings growth rate potentially in the mid-to-high 20s for the quarter is still impressive.

· Estimates for 2022 have been holding up well. Historically, earnings estimates fall during reporting season, which isn’t happening so far.

So, volatility can be uncomfortable, but it is well within the range of normal based on history. The average max drawdown in a positive year for stocks is 11%. LPL sees the S&P 500 at year end potentially at 5,000 – 5,100, more than 12% above last Friday’s closing price at the low end. – Mark

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. No strategy assures success or protects against loss. Economic forecasts may not develop as predicted. Stock investing includes risks, including fluctuating prices and loss of principal.  Some of this research material has been prepared by LPL Financial. All indices are unmanaged and may not be invested into directly. Past performance is no guarantee of future results.  Referenced material: LPL Research Weekly Market Commentary dated 1/24/2022, approved tracking #:1-05235161.  Ref LPL Approved #1-05241953.