The S&P 500 closed at 4,766, which was an increase of 1,010 points or 26.9% for the year and a gain of 90% over three years. It notched 70 record highs during the year with a closing high point of 4,793 this past Wednesday and an intra-day high of 4,809 just a day ago.
The Dow closed at 36,388, an increase of 5,732 points or 18.7% for the year, and the smallest rise of the three major Indexes. It also hit its all-time closing high on Wednesday at 36,489 and intra-day high on Thursday at 36,679.
The Nasdaq closed at a 15,645 on Friday and rose 21.4% or 2,757 points for the year. Its all-time closing high was on November 19 at 16,057 with an intra-day high of 16,212 on November 22. While the S&P 500 and Dow were closed less than 1% off their closing highs by 0.6% and 0.4%, respectively, the Nasdaq was off by 2.6%.
While it is easier to hit a new record high after a new record is created, the economic and financial environments have to be in sync for this to happen. In 2021 the U.S. economy came back with a vengeance as Covid-19 vaccines became available and the Fed continued to pump money into the markets. This allowed the Index to hit 70 closing record highs this year, which is the second highest number besides 1995’s 77 closing highs, as tracked by Charlie Bilello at Compound Capital Advisors.
The markets remained strong in the latter part of the year as they climbed the proverbial “wall of worry” with concerns about the Omicron variant causing more supply chain issues and slowing the economy, the Fed accelerating its tapering program and raising interest rates next year and inflation remaining at elevated levels.
Earnings led the way but slower growth in 2022
S&P 500 earnings are on track to increase 46.3% this year per John Butters at FactSet, but the better comparison is the 26.0% increase from the pre-pandemic year 2019. Earnings growth allowed the markets to hit new highs even as the Index’s P/E multiple contracted a bit. While earnings growth should slow in 2022, they are still expected to increase 8.7% to 223.48 for the S&P 500.
P/E multiple fell slightly during the year
When the market fell dramatically in early 2020 when the coronavirus first started to spread the Index’s fall was greater than earnings were cut, which resulted in the P/E multiple dropping to 13x. Then a combination of analysts cutting estimates and a rebound in the Index led to the P/E multiple quickly rising to 22x.
Then as companies were able to mitigate the virus’ impact to their bottom line and the Fed pumped trillions of dollars into the financial markets, the market assigned a much higher multiple to earnings since interest rates fell and it became a TINA market or “There Is No Alternative” to stocks to generate a return.
The S&P 500 was able to smash record after record in 2021, even with the market’s earnings multiple declining, as earnings growth more than made up for the slightly lower valuation. It isn’t surprising to see the Index’s P/E multiple decline for the year as the Fed finally announced it would slow its bond purchases and signaled raising interest rates next year.
What does 2022 have in store for the market?
While S&P 500 earnings growth rate will almost certainly slow in 2022 from 2021’s 46%, it is forecast to increase 8.7% and to be 37% higher than pre-pandemic 2019’s. If P/E multiples could stay the same in 2022 the market increasing 9% would be considered very solid, especially after such a strong performance this year. However, the biggest risk to the market’s equation of earnings times the P/E ratio to provide a value for the Index is the current 21x multiple falling.