The S&P 500 ended the first half of the year with a 20.6% fall, marking its worst H1 since 1970. Alongside the benchmark index, the SPDR S&P 500 Trust ETF (NYSEARCA:SPY) also lost 20.6%.
A combination of factors caused the slump, starting with surging COVID-19 cases driven by the Omicron variant at the beginning of the year. Then followed Russia's invasion of Ukraine, decades-high inflation and aggressive interest rate hikes from the Federal Reserve, stoking worries of a possible recession and slowing economic growth.
"The first half of the year has been difficult for investors with prices dealing across asset classes. While we often hear that the S&P 500 declined only modestly, the reality is that a typical cross-asset portfolio declined more than during the 2020 pandemic or any other crisis after 2008 (due to simultaneous declines in stocks and bonds)," said JPMorgan in its global research mid-year outlook.
This year's performance is a stark contrast to 2021, which saw the S&P 500 gain in both H1 and H2 on the back of a reopening of the economy, abundant liquidity, ultra-loose monetary policy and signs of economic recovery returning to pre-pandemic levels.
Amongst the eleven sectors of the S&P 500, energy was the only one to end in the green, adding nearly 30% in H1, as oil prices soared after Russia's invasion of Ukraine. Amongst the losers, utilities fell the least (-2%), while the communication services and consumer discretionary sectors slumped more than 30%.
See below a breakdown of the eleven sectors of the S&P 500 and their H1 performance. Additionally, see how the accompanying SPDR Select Sector ETF performed from the close on December 31st, 2021 to the close of June 30th, 2022.
#1: Energy +29.2%, and the Energy Select Sector SPDR ETF (XLE) +28.8%. Read: Energy sector second half outlook - expect the unexpected.
#2: Utilities -2%, and the Utilities Select Sector SPDR ETF (XLU) -2%.
#3: Consumer Staples -6.8%, and the Consumer Staples Select Sector SPDR ETF (XLP) -6.4%.
#4: Health Care -9.1%, and the Health Care Select Sector SPDR ETF (XLV) -9%. Read: COVID vaccine stocks lead biotech selloff in 1H; three reasons to see recovery.
#5: Industrials -17.5%, and the Industrial Select Sector SPDR ETF (XLI) -17.5%. Read: Allegheny leads industrial gainers in H1, top 5 losers see over 50% stock value wiped out.
#6: Materials -18.7%, and the Materials Select Sector SPDR ETF (XLB) -18.8%.
#7: Financials -19.5%, and the Financial Select Sector SPDR ETF (XLF) -19.5%. Read: Financials stocks dropped with broader market in H1, while insurers climbed.
#8: Real Estate -21.2%, and the Real Estate Select Sector SPDR ETF (XLRE) -21.1%. Read: Real Estate slumps 21% in 1H22, focus on mortgage rates.
#9: Information Technology -27.2%, and the Technology Select Sector SPDR ETF (XLK) -26.9%.
#10: Communication Services -30.5%, and the Communication Services Select Sector SPDR Fund (XLC) -30.1%. Read: Communications stocks stumble into second half, bracing for slowdown.
#11: Consumer Discretionary -33.1%, and the Consumer Discretionary Select Sector SPDR ETF (XLY) -32.8%.
Below is a chart of the eleven sectors' year-to-date performance and how they have fared against the S&P 500.
Outlook for H2:
The Federal Reserve will be firmly in the spotlight in the coming months, as the U.S. central bank gears up further rate hikes to combat rising inflation. Many are worried that the Fed's actions may not be able to temper inflation and could push the economy into a downward spiral as borrowing costs increase.
"The FOMC has signaled their commitment to bringing inflation back to the 2.0% target, and seems intent on doing so even at the expense of growth," UBS research said last month.
"Our U.S. economists expect the Fed to hike overnight rates to 3.25-3.5% by end '22 & 4-4.25% by mid '23," BofA global research said in June. "The rate outlook will largely hinge on the path of inflation. We continue to believe that inflation will moderate over the next 6-12m with coming growth slowdown/recession; however, we recognize inflation risks are on the high side," BofA added.
Expectations have also been tempered by many entities with regard to earnings for the rest of the year. Earnings season, which kicks off later this month, could present a trading risk, though buy-the-dip institutional managers and retail investors could help prop up the markets.
Goldman Sachs research believes consensus margin forecasts suggest that earnings estimates are likely too optimistic, and that profit margins for the median S&P 500 company will likely decline next year whether or not the economy falls into recession.
"While investors are focused on the possibility of recession, the equity market does not appear to be fully reflecting the downside risks to earnings," Goldman Sachs said.