Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

RUNNING uphill, swimming against the tide - choose your metaphor for today’s investing environment. When inflation is high, interest rates rising and valuations easing back, earnings have to work increasingly hard to keep share prices rising. So, what’s the profits outlook?

Hanging in there

We’re half-way through the fourth quarter earnings season. About 280 of the S&P 500 index’s constituent companies had reported by the end of last week. And despite some spectacular misses, like the one from Facebook-owner Meta, it’s looking OK. Roughly three quarters of results have beaten expectations by about 5%. Another big week of results lies ahead, by the end of which we should have a clearer idea of how 2022 will shape up. For the year ahead, momentum is waning slightly, but at 7% expected earnings growth, down from 9% at the start of the year, it still looks good enough as long as valuations stabilise, the Fed goes no faster than expected and inflation starts to ease in the summer.

Market maths - rein in your expectations

After last year’s spectacular market performance, it would be prudent to expect a slower grind in 2022. If earnings do grow by 7%, and we assume that valuations have a bit further to fall, then this might be a year of 5-6% stock market growth. For the S&P 500 that means 4,750 by the end of the year, roughly where it peaked recently. Not a disaster but not very exciting either. A time to focus on cheaper markets like the UK, on protecting capital and on picking winners. This will be a year for active rather than passive investing.

Where next for oil?

A key component of the inflation question, and where interest rates head this year, is the oil price. At close to $90 a barrel, Brent is now more than four times the level it reached at the worst of the pandemic lockdowns in early 2020. Can it go higher still? Quite possibly. Demand growth is strong as critically low inventories are rebuilt and big infrastructure plans start to be implemented. Jobs growth remains strong, as shown by the 467,000 jobs created in the US last month, three times the number expected. At the same time, supply is constrained. OPEC is trying to pump more but coming up against production limits. Meanwhile, Shale has never recovered from the price slump in 2020 that discouraged investment.

January barometer - should we worry?

The old adage says ‘as January goes, so goes the year’. It’s true - a bad first month does tend to lead to lower returns for the year as a whole than a strong one. But data going back to 1900 shows that the same is true of all the other 11 months too. The market falls last month are another reason to expect a slower year than in 2021. But there’s nothing special about January.

Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.

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