Here’s what could rattle the stock market this year

Sure, it’s been a rocky start to the year on Wall Street after a fantastic 2021 Dow has fallen about 1% and the S&P 500 has fallen by 2%. Trading was volatile. But the Dow and S&P are still just 3% below their all-time highs each.

Tech stocks have had a bit more of a wild ride. The Nasdaq is down 5% in 2022 and nearly 8% below its peak, bringing it closer to a 10% drop known as a correction.

Traders have so far largely dismissed temporary concerns about inflation and the Federal Reserve poised to raise interest rates, as well as fears about the impact the Omicron variant of Covid-19 could have on the economy. Despite these factors, earnings growth has remained strong.

“It’s been a Teflon market lately,” said Bill Sterling, global strategist at GW&K Investment Management, referring to the infamous non-stick material. “Expectations have changed a bit now that a rate hike cycle is starting earlier, but the market is rejecting that.”

So what needs to be done to really tickle Wall Street’s nerves in a meaningful way?

“I am not surprised by the resilience of the market as the fundamentals for earnings and the economy are still strong,” said Larry Adam, Chief Investment Officer at Raymond James. “But the markets are in many ways due for a downturn.”

Adam said investors should watch the Fed. If it has to raise short-term interest rates even further than expected due to inflation, it could cause more market jitters.

“Investors may become nervous about increased volatility,” he said. “If the Fed is more aggressive, it could deter the markets.”

Rising bond yields could still be a problem

The prospect of significantly higher yields could also slow the economy and dent stock prices.

“The bond market is now a mystery where inflation is. I don’t think interest rates will stay at this level,” said Steve Wyett, chief investment strategist at BOK Financial.

“We may have market volatility around the midterms, but that’s not in the forecasts yet,” Wyett said.

Still, investors can continue to drown out any buzz about politics, Covid, and even inflation, as long as corporate earnings continue to lug at a healthy pace.

According to forecasts from FactSet Research, analysts still expect earnings for the S&P 500 to rise nearly 10% from last year. While that’s a sharp slowdown from expected 2021 earnings growth of 45% from the Covid-induced 2020 lows, it’s still not something to sneeze at.

“It could be a bumpy ride for stocks with more modest returns.” GW&K’s Sterling said. “But the outlook for earnings growth is still solid.”

At the start of the pandemic, stocks, albeit briefly, entered a bear market. Major indices fell more than 20% shortly after the first wave of the Covid-19 outbreak brought the US economy to a standstill, but stocks bounced back thanks to the reopening of the economy, vaccines and strong gains.

So as long as the economy and earnings continue to grow, and vaccines and boosters prevent businesses from going back into lockdown mode, Wall Street may not be ripe for another bear run just yet.