- Stocks have taken a hit in 2022 as economic growth falters, inflation surges and war rages.
- But Russell Price, chief economic officer at Ameriprise Financial, is bullish on stocks and the economy.
- Here are the three sectors Price likes the most, with shares poised to climb over 10% this year.
From a shrinking economy to high inflation to the war between Russia and Ukraine, investors have had no shortage of headaches this year. But the chief economic officer of a $30 billion financial planning firm believes many of today’s biggest concerns will be distant memories by the end of the year.
In a recent interview with Insider, Russell Price, chief economist at Ameriprise Financial, said he expects the S&P 500 to end the year at 4,700 as the US avoids a recession. For the widely used index to reach that mark, it would need to rise over 11% from its current level.
The case for a stock market rally
A stock recovery will come as corporate earnings continue to grow, above-trend inflation eases and fears of an economic slowdown begin to fade, Price said.
Both components of stock valuation — earnings and multiples of what investors pay for a stock — are under pressure this year. But S&P 500 earnings are still expected to rise 9% in 2022, Price said, roughly in line with the FactSet analysts’ consensus estimate of 10.9%.
S&P 500 earnings per share would hit $225 if they split the difference between those two estimates and increased by 10%. That level, coupled with a “reasonable” P/E ratio of 20-21 according to Price, would take the 500 component index to 4,500-4,725. Higher interest rates hurt by multiples, but Price said valuations have already fallen drastically this year.
In addition, inflation likely peaked at 8.5% in March and will steadily slow, the economist said. If the price is right, the
federal reserve
may not raise interest rates as aggressively as planned, which could reduce the risk of a policy mistake causing a downturn.
A
recession
, historically defined as consecutive quarters of falling GDP, is not Price’s base case. But the economist conceded that it’s about twice as likely as normal right now – and that was before GDP contracted an unexpected 1.4% in the first quarter. The US economy is now just one bad quarter away from a second recession in three years.
But even if a downturn does come, it will be “relatively brief and shallow,” Price said, as consumers appear financially healthy and willing to spend.
While Price said there was no surefire recession signal, he added that perhaps the most helpful indicator is the financial obligation ratio, which shows household debt relative to disposable income. It’s lower than it was at any point in the 1980s, 90s, or 2000s, meaning consumers have plenty of cash.
“I really can’t overstate the low level of consumer debt,” Price told Insider. “That’s a very important factor, and that doesn’t even take into account the increased savings and value that people have in their homes and the added stability they have from a strong job market. So aside from inflation, a lot of things are in the consumer’s favor at this point.”
Where to invest when US stocks rebound
Price’s thesis that the US will dodge a recession is coupled with an ongoing preference for domestic stocks over their international peers, a preference he has held in recent quarters. Europe’s economy is ailing as Russia’s invasion of Ukraine wreaks economic havoc in the region, Price said. And the conflict may not end any time soon.
Within the US stock market, Price said he’s a fan of three sectors: finance, healthcareand technology. All three are down this year, although the first two are down less than the S&P 500. But technology stocks have taken a huge hit as investors dump growth stocks.
Financials were underwhelmed after the year started as Wall Street’s most recommended sector. Recession fears have gripped the economically sensitive group.
However, Price said financials are still a good bet as profit margins widen and the Fed hikes interest rates. In theory, banks should increase profitability when interest rates rise by borrowing cheaply and lending at higher rates, but a temporary yield curve inversion made things difficult. The sector is down 9% since this rare phenomenon spooked investors, but Price’s thesis hasn’t changed.
“We still think their net interest margins will increase,” Price said. “And while the 10-year/2-year segment has been flat — and even temporarily inverted — we still believe their net interest margins will widen over time.” And they should continue to see relatively decent credit demand. “
Meanwhile the
health sector
offers a promising combination of attractive valuations and good sales growth, according to Price. The main catalyst for the group, Price says, is that health services like electoral processes continue to resume as the pandemic subsides.
Finally, technology isn’t popular right now, but it’s enticing from a contrarian investor’s perspective, Price said. His propensity is to target mega-cap names that are making money, have robust balance sheets, and are buying back shares in droves.
“There’s a good number of very well-known, heavily weighted companies in the technology space that are showing high growth but are also very profitable,” Price said. “So it’s no longer 1999 where they don’t have earnings to report, just future expectations.”
While Price didn’t recommend any specific stocks or investment products, Insider compiled a list of exchange-traded funds (ETFs) that investors can consider to get exposure to the sectors the business chief says he prefers.
These ETFs include iShares US Financials ETF (IYF) and Invesco KBW Bank ETF (KBWB) for financials, SPDR Fund (XLV) and SPDR S&P Health Care Services ETF (XHS) for healthcare, and Technology Select Sector SPDR Fund (XLK) and Invesco QQQ Trust Series 1 (QQQ) for Tech.
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