This holiday-shortened week, stocks have undergone turbulence due to a bevy of risks, including the fast-spreading Omicron variant, hotter-than-expected inflation, and a more hawkish Federal Reserve.

However, barring a Christmas catastrophe, the major equity indices are on track to post double-digit gains for the full-year. As 2021 winds down, investors are unlikely to get “Scrooged.”

The severity of Omicron remains a matter of debate, but Wall Street seems to have reached at least one conclusion: initial fears of the variant caused many quality stocks to get oversold. Hence the recent relief rally.

The major U.S. stock market indices on Tuesday bounced back from their three-day rout, sharply rising as follows: the Dow Jones Industrial Average +560.54 (+1.60%); the S&P 500 +81.21 (+1.78%); the NASDAQ +360.14 (+2.40%); and the Russell 2000 +63.07 (+2.95%). Reopening plays, such as travel and hospitality stocks, led the surge.

In pre-market futures trading Wednesday, stocks were little changed. Trading volume tends to be light this time of year,

Negative factors have been playing tug-of-war lately with such positives as economic expansion, jobs growth, and robust corporate earnings.

Read This Story: Worried The Economy Is Tanking? Don’t Be

I’ve been consistently bullish all year, despite the dire headlines and the uncertain path of the pandemic. Strong corporate earnings growth is a major reason why.

According to research firm FactSet, the estimated year-over-year earnings per share (EPS) growth rate for the S&P 500 for the fourth quarter of 2021 is 21.3%.

The estimated earnings growth rate for calendar year (CY) 2021 is 45.1%, which is above the trailing 10-year average (annual) earnings growth rate of 5.0% (2011 – 2020).

If 45.1% turns out to be the actual growth rate for CY 2021, it will mark the highest annual earnings growth rate reported by the index since FactSet began tracking this metric in 2008 (see chart).

The current EPS growth record is 39.6%, which occurred in CY 2010. All 11 S&P 500 sectors are projected to report year-over-year growth in EPS in 2021, led by energy,
industrials, materials, consumer discretionary, and financials.

To be sure, high earnings growth is partly a function of the low year-over-year baseline established in 2020 during the worst of the pandemic. However, economic reopening is boosting corporate operating results to a legitimately healthy degree, despite abnormal comparisons caused by the pandemic.

Net profit margins remain intact…

Have labor shortages, supply chain disruptions, COVID uncertainties, and the overall rise of inflation hurt net profit margins? On the contrary, margins are rising.

The estimated net profit margin (based on aggregate estimates for revenues and earnings) for the S&P 500 for CY 2021 is 12.6%.

If that number turns out to be the actual net profit margin for the index, it will mark the highest annual net profit margin reported by the index since FactSet records began for this metric in CY 2008. In fact, analysts expect the S&P 500 index to post an even higher net profit margin (12.8%) in CY 2022.

One factor keeping profit margins afloat is the pricing power of large-cap companies that dominate their markets. They’re raising prices not because of supply chain problems, but simply because they can.

The unexpected “stickiness” of inflation owes much to this corporate behavior. If the trend continues, there’s the danger that inflation becomes structural, as inflationary expectations among companies and consumers become self-fulfilling.

Riding the seesaw…

Recent volatility in the stock market is largely a result of investor optimism that the economy will survive the pandemic, followed by the pessimism that it may take longer than hoped because of curve balls such as Omicron.

This seesaw action is likely to carry into 2022. However, the latest scientific assessments provide hope that Omicron may be short-lived. What’s more, vaccine development continues apace. The Delta variant burned itself out and we no longer hear about it in the news; Omicron may follow the same merciful path.

I think the bull market has plenty of momentum left, but the early phase of the expansion has passed, which is typically the most powerful point of the cycle. Market gains are likely to continue in 2022 but with less momentum and more frequent pullbacks. To counterbalance these risks, proper diversification across sectors and asset classes is key.

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John Persinos is the editorial director of Investing Daily. To subscribe to John’s video channel, follow this link.