Will Stocks Continue to Fall or Go Back Up in the Second Half of 2022?

Mohit Oberoi, CFA - Author
By

Jun. 29 2022, Published 12:33 p.m. ET

While U.S. stocks are off their 2022 lows, they have struggled to hold on to their recent gains. U.S. stocks are having their worst first-half performance in decades. As we wrap the first half of the year, investors wonder whether markets will continue to fall or if stocks will go back up in the second half of 2022.

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So far in 2022, while U.S. stocks have recovered multiple times, they have eventually fallen to newer lows. Earlier in June, the S&P 500 hit the lowest level for the year as spiraling inflation and steep rate hikes from the Federal Reserve took a toll on market sentiments.

Some brokerages believe U.S. stocks would continue to fall.

Some brokerages believe that U.S. stocks will continue to fall in the second half of 2022. Morgan Stanley was bearish on U.S. stocks at the beginning of 2022 and had one of the most pessimistic predictions for the S&P 500. It expects the index to fall to 3,000 to fully price in the deteriorating macro factors.

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Société Générale also thinks that U.S. stocks haven’t bottomed and expects the S&P 500 to fall to 3,200. Bank of America predicts that the S&P 500 hasn't bottomed yet and thinks that the index will bottom in October at 3,000. Berenberg also thinks that stocks haven’t bottomed yet and have room to fall more.

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JPMorgan Chase expects U.S. stocks to recover in the second half of 2022.

While the mood on Wall Street has been somber, JPMorgan Chase struck a discordant note from the overwhelming pessimism and said that it expects U.S. stocks to bounce back in the second half of 2022. The brokerage expects the S&P 500 to close at 4,800 in 2022, which would be a new record high for the world’s most popular index. Bank of America also expects U.S. stocks to bounce back after October and is predicting a six-year bull market, which it believes can take the S&P 500 to 6,000 by 2028.

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Brokerages have been lowering their S&P 500 2022 predictions.

Most brokerages have been lowering their 2022 predictions for the S&P 500. RBC Capital Markets has now predicted that the S&P 500 will close at 4,700 in 2022, which is lower than its previous forecast of 4,860.

Binky Chadha of Deutsche Bank also lowered his 2022 S&P 500 target by 500 points to 4,750. While Chadha disagrees with some analysts’ view that a U.S. recession is imminent, he predicts that the S&P 500 will fall to 3,000 in case of a recession.

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What factors will drive stocks in the second half of 2022?

Unless we see a new supply-side shock or some really stringent sanctions against Russia, inflation should taper down in the second half of 2022. We have already started to see commodity prices, including oil prices, come off their 2022 highs.

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Slowing demand would also propel companies to lower prices, especially since commodity prices have cooled off. If inflation stabilizes, the Fed might not go overboard with its rate hikes. The U.S. Central Bank is widely expected to raise rates by 75 basis points in its next meeting and then move towards more “normal” rate hikes.

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Overall, the outlook for stocks in the second half of 2022 will depend on whether the U.S. economy can fend off a recession. The Fed has warned that its rate hikes might lead to a recession even though it said that it isn't deliberately trying to push the U.S. economy into a forced recession.

If the Fed can steer the U.S. economy towards a "soft landing," stocks should also recover in the back half of the year. However, stocks could fall further if we see a recession.

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