2022 started out well for the S&P 500 ETF (NYSEARCA:SPY). For two days, SPY stock looked like it would break out above $80 and find new highs. Instead, the exchange-traded fund (ETF) peaked at $479.98. It broke through key moving averages in the months that followed.
With sentiment at bearish-level lows, institutional investors are selling whenever the market rallies.
Conversely, retail investors who kept buying the dip are losing patience. They risk bigger losses if the widely-held index continues its downtrend.
Technology Crash Weighs on SPY Stock
Readers may argue that the technology stock correction is not a crash. Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), and Amazon (NASDAQ:AMZN) account for over 15% of the SPY ETF. Those mega capitalization companies did not fall by much compared to the broad technology market. They may be near a bear market, taking the 52-week high as a starting point. Still, companies that traded on the stock exchange for one or two years are faring worse.
Investors should separate the post-Covid-19 technology stocks from Microsoft, Apple, and Amazon. Companies that adapted to the lockdown and remote work booked years of sales in a few quarters. This includes Teledoc Health (NYSE:TDOC), Zoom Video (NASDAQ:ZM) and DocuSign (NASDAQ:DOCU). Those firms will report below-average growth in 2022. Demand for remote solutions will slow as workers return to the office.
Bears will point out that Microsoft’s Azure, SQL database, and Office cloud productivity solutions benefited from Covid-19 lockdowns. In its second-quarter 2022 report posted on Jan. 22, 2022, Microsoft hardly showed any weakness. Revenue grew by 20% year-over-year (YoY) to $51.7 billion. Net income grew by 21% YoY to $18.8 billion.
Apple is not relying on past demand momentum to grow. In its “Peek Performance” event, the company announced a new Mac Studio, iPhone SE 3, iPad Air, and Studio display. Skeptics will look at the new green versions as a non-event.
They are correct.
Apple’s iPhone SE is a notable release. Its improved specifications are small. For example, it has a faster A15 processor and a better camera. The 5G update is a compelling upgrade for consumers. Those who cannot afford the mainstream models will opt for the inexpensive SE. Apple’s strong results in the upcoming quarter should reverse the AAPL stock downtrend.
SPY Stock Brings Opportunity
Investors will rely on the SPY ETF’s 27% exposure to information technology for growth. Healthcare, which has a 13.7% weighting on the index (as of last week), is an upside opportunity for conservative investors. Companies like UnitedHealth (NYSE:UNH) have an online presence to serve its customers. UNH’s Optum unit launched a specialty fusion medication management solution in Feb. 2022.
Specialty drug costs will reach $505 billion by 2023. Optum will leverage its data and clinical expertise to give care providers and healthcare payers real-time insight. It will help patients get special treatment at the lowest cost. Amid rampant inflation, Optum’s quest to help its customers save money will indirectly benefit UNH stock. Investors may avoid the guesswork on stock selection by holding SPY stock.
Strong performance in the consumer discretionary sector will support the S&P 500’s performance this year. Companies like Tesla (NASDAQ:TSLA) give investors a healthy exposure to the growing electric vehicle market. McDonald’s (NYSE:MCD) has a strong brand name recognition. It has an aggressive advertising budget to support sales.
In the home improvement sector, Lowe’s (NYSE:LOW) and Home Depot (NYSE:HD) will grow. Home prices show no signs of weakening. Customers will invest in their homes, especially as corporations support permanent work-from-home. Other firms will set a hybrid work environment. After companies invested heavily in cloud solutions, they will leverage their computing infrastructure to complement their physical workspace. HD and LOW stock will benefit from continued demand.
And Risks
The Federal Reserve’s aggressive rate tightening cycle in 2022 could force a reset on the S&P 500 valuation. Furthermore, the much-needed tapering that lifted stocks to unsustainable levels is a headwind for the stock market.
Markets might speculate that the Fed cannot raise rates by much. The war accelerated inflation rates. Until that ends, It is out of the Fed’s control. Still, in February, the consumer price index increased 7.9% before seasonal adjustment. This indicates that the war is not the primary contributor to higher costs. Pandemic induced high government spending, multiple stimulus packages since 2020, and an accommodative monetary policy led to uncontrollable inflation rates.
Unproven technology firms that crashed risk pulling companies on the index lower. Fortunately, the heavily weighted companies on the S&P 500 index will sustain the selling pressure ahead. Eventually, market bearishness will end. When that happens, investors who sold stock before the drop will accumulate SPY stock.
The excess cash in investor accounts will lose value thanks to inflation. Savers have no choice but to wait for the market sell-off to ease. With mega-cap stocks at better valuations, long-term investors may build a decent position in the widely held index.
Your Takeaway for SPY Stock
Investors who build a position in the S&P 500 for the long-term should out-perform the market. This ETF takes away the guesswork from stock picking. When many unproven companies that did not make money sold off, investors avoided them by holding the S&P 500 ETF.
Investors should continue with the strategy of increasing their SPY ETF weighting as prices fall. The U.S. market will have strong growth potential relative to other countries.
On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
