‘Proceed with caution’: this is what Wall Street analysts see for the US stock market in 2022
The recent increase in market volatility could herald a bumpier U.S. stock market in 2022, as investors face an inflection point in monetary policy during the pandemic.
“There will likely be high volatility around the potential Fed policy tightening,” Shawn Snyder, head of investment strategy at Citigroup’s US consumer wealth management division, said in an interview. telephone. “Omicron throws a heavy blow” on the outlook for 2022, he said of the new variant of the coronavirus, although investors seemed encouraged by some warning signs that it may be less dangerous than it is. initially feared.
The CBOE VX00 volatility index,
or VIX, jumped in late November and remains above its 200-day moving average even after calming down since last week, according to FactSet data. The VIX topped 30 last week for the first time since the first quarter of 2021, data shows, amid market nervousness over the emergence of the omicron and the potential Federal Reserve move to pull some homes off the market faster than investors expected. .
“It’s a big transition that creates tensions for investors,” Lauren Goodwin, economist and director of portfolio strategy at New York Life Investment, said in a telephone interview. The Fed appears to be positioning itself for more flexibility for potential interest rate hikes next year, with increased inflationary pressure likely to result in more rate hikes in 2022 than currently expected, creating more market risk, she declared.
Some investors fear that interest-rate-sensitive growth and tech stocks will be particularly vulnerable if the Fed tightens monetary policy aggressively through rate hikes. The S&P 500 index, SPX,
which has wide exposure to tech, is on track for a third consecutive year of strong gains after rising nearly 25% in 2021 through Tuesday, according to FactSet.
The US stock market is likely to generate more modest gains “with higher volatility” next year, Jeffrey Kleintop, chief global investment strategist at Charles Schwab, told MarketWatch by phone.
Goodwin said she expects increased volatility as well, amid transitions that include the demise of fiscal stimulus that provided direct support to consumers during the COVID-19 crisis and the Fed pulling its “footing” of the accelerator “in economic recovery. She expects “much lower” stock returns next year compared to the gains so far in 2021.
“Most of the equity rally is expected to be achieved by” and the first half of 2022, “when the favorable winds in monetary and fiscal policy are strongest,” JPMorgan Chase & Co strategists said on Wednesday. . in a report on outlook 2022.
Wall Street banks have rolled out their 2022 forecast for the S&P 500, with Goldman Sachs Group and JPMorgan being among the most bullish on US stocks.
Goldman expects the S&P 500 to end in 2022 at 5,100, according to a Dec. 3 portfolio strategy research report from the bank. Meanwhile, analysts at JPMorgan predicted in a research report in late November that the US benchmark would rise next year to reach 5,050, in part because of “robust earnings growth” and the downturn. alleviation of supply chain problems. RBC Capital Markets has forecast the same price target as JPMorgan, while Deutsche Bank expects the S&P 500 to end next year at 5,000, according to a slide presentation from its chief investment office.
Meanwhile, Citigroup has set an S&P 500 target of 4,900 for the end of 2022, according to a research report from the bank in late October. Below that level, Barclays predicted in a US equity strategy report this month that the index would end next year at 4,800.
“Proceed with caution,†Barclays analysts wrote in their Dec. 2 Outlook 2022 report. “We see a limited rise for stocks next year,†they said. In their view, “household and business cash reserves are expected to support modest profit growth, but persistent supply chain problems, the reversal of the trend in consumption of goods and the hard landing of the economy. China are the main tail risks “.
Bank of America analysts have a lower price target than Barclays for the S&P 500 next year, with a BofA Global Research report last month showing the benchmark will end in 2022 at 4,600.
“Unfortunately, we see a lot of similarities between now and 2000 – the peak of the tech bubble,†said Savita Subramanian, head of equity and quantitative strategy at BofA, at a press conference at the end of November on their outlook. American stock markets.
See: S&P 500 could end ‘fairly flat’ in 2022 amid previously ‘unthinkable’ negative real rates, says BofA strategist
Morgan Stanley has a more bearish outlook for next year which puts the S&P 500 below the index close on Tuesday at 4,686.75. A report released on Monday by the bank’s wealth management division shows a baseline forecast of 4,400 for the S&P 500 at the end of 2022, even with an expected profit gain.
“We expect the S&P 500 to be limited and volatile, and bond yields to be negative net of inflation,†said Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management, in the note. “Fixed income securities should be reduced to fund greater exposure to real assets and absolute return funds. “
The core of Morgan Stanley’s “cautious” view on the S&P 500 is based on price-to-earnings ratios generally compressing during “a mid-cycle transition,” Shalett said. She pointed to a chart in her memo showing that “the median stock has gone through the mid-cycle transition.”
MORGAN STANLEY HERITAGE MANAGEMENT REPORT AS OF DEC. 6, 2021
The chart shows that “the median S&P 500 has corrected 15% from its 52-week high,” but the index has been held aloft by the top 15 companies now accounting for 40% of its share. market capitalization, according to its rating.
“While these may be great companies, we are less confident that they will all be great stocks in 2022 as financial conditions tighten, interest rates rise, employment costs rise. increase and inflation remains difficult, â€Shalett said. “We believe the top 15 profit margins have peaked.”
In Morgan Stanley’s view, “this suggests that investors should move towards stock selection and move away from passive index funds,” his note said.
JPMorgan expects “international equities, emerging markets and cyclical market segments to significantly outperform,” according to its report on Wednesday.
“The reason is that we are expecting an increase in interest rates and a slightly tighter monetary policy which should be a headwind for high multi-level markets such as the Nasdaq,” JPMorgan strategists wrote. , citing the technology officer Nasdaq Composite Index COMP,
Citi’s Snyder told MarketWatch that “mid-cycle” he likes high-quality stocks, “dividend-paying” and global health-care stocks. Steady earnings growth and “reasonable valuations” make healthcare attractive, he said, and stock betting in the region can serve as a “volatility buffer” in portfolios.
Immunology is one of three megatrends set to accelerate next year as “a range of next-generation oncology therapies are undergoing approval and enable more targeted treatment of cancer,” according to Jeff Spiegel, Head of US Megatrend iShares and International ETFs. Shares of the ETF IDNA iShares Genomics Immunology and Healthcare,
were up about 0.2% this year based on midday trading on Wednesday, according to FactSet data, when last checked.
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Two other megatrends to watch out for in 2022 are the escalating ‘digital transformation’ through cloud, 5G and cybersecurity, and ‘automation technologies’ such as robotics and artificial intelligence, Spiegel wrote in a report this month. Automation technologies are expected to develop “in response to continued supply chain bottlenecks and wage inflation” during the pandemic, he wrote.
“I think we’re actually going to face gluts next year rather than shortages,†Charles Schwab’s Kleintop said. “This will help bring inflation down, especially in the second half of next year, making an aggressive rate hike path unlikely.”
The market expects three rate hikes from the U.S. central bank in 2022 after Fed Chairman Jerome Powell signaled last week that he could accelerate the cut in its monthly asset purchases, said Deepak Puri, Deutsche Bank’s CIO for America, during a press briefing. Monday on his outlook for next year.
While the Fed may become more aggressive in cutting its bond purchases, potentially completing the process in March instead of June, Puri said, he expects the Fed to still be “dovish” on rates. next year. Puri expects the Fed to hike rates only once next year, which is below consensus, he said.
“We expect two rate hikes next year,†said Goodwin of New York Life Investment.
Shalett of Morgan Stanley wrote in his Outlook 2022 note that “we are seeing classic reflationary rebalancing in which higher nominal and real rates reflect higher average growth and inflation rates.” She also expects yield curves to steepen, profit margins to be squeezed by rising costs and price-to-earnings ratios to contract in “rate-sensitive sectors.”
“In the United States, we like the themes of reopening and reflation and the beneficiaries of higher bond yields,†JPMorgan said in its report Wednesday. Bank strategists expect the yield on the 10-year T-bill TMUBMUSD10Y,
will rise to 2.25% by the end of next year, according to the report.
“Our point of view is that 2022 will be the year of a full global recovery, an end of the global pandemic and a return to the normal conditions we had before the COVID-19 outbreak”, Marko Kolanovic , chief global markets strategist at JPMorgan, and the bank’s global co-head of research, Hussein Malik, wrote in the report on Wednesday.
According to Shalett, “In many ways, 2022 will be a critical year when the imbalances caused by the global pandemic begin to reverse and the business cycle normalizes to extremes.”