Wall Street bets S&P 500 will bid farewell to outsized stock gains in 2022


U.S. stocks are on course to end 2021 with another year of outsized gains. Many investors don’t expect a repeat in 2022.

The S&P 500 has climbed 26% so far in 2021, after rising 16% in 2020. Roaring corporate profits and accommodative monetary policy have fueled the race. Profit growth is expected to moderate next year, and the Federal Reserve is continuing its plans to raise interest rates, reducing key supports for the stock market‘s recovery.

When rates are low, investors tend to stock up on risky assets such as stocks to generate returns. When inflation accelerates and policymakers raise interest rates, the value of future corporate profits declines and investors have more options for finding places to make money.

Lower interest rates in early 2020 helped propel equity valuations higher, and they have remained elevated in the months since. Many analysts and investors now believe that raising rates is likely to prevent valuations from continuing to rise and could push them down.

While stock indices often continue to rise at the start of a rising interest rate cycle, tighter monetary policy puts portfolio managers on a shorter leash and makes many reluctant to take more. of risks.

“We know there is going to be a rate hike,” said Tiffany Wade, senior portfolio manager at Columbia Threadneedle Investments. “How long before that do you start to position yourself on valuations that maybe could go down?” “

The S&P 500 traded last week at about 21 times its projected earnings over the next 12 months, above a five-year average of just under 19 times, according to FactSet.

Some strategists believe that the change in monetary policy could help limit stock market gains to levels more in line with their long-term trend. The S&P 500 has averaged an annual gain of 8.4% since 1957, when it was introduced, until last year. But he comes out of three much stronger years. The index jumped 29% in 2019, even more than its gains in 2020 and so far in 2021.

“This is not normal,” said Joseph Amato, chairman and chief investment officer of equities at asset manager Neuberger Berman. “It’s been an amazing period of return, and we expect you won’t see this kind of market performance in 22.”

There are of course reasons to be humble about stock forecasts: Analysts cannot predict world events, or even how the market will react to them. Many analysts believed stocks would plunge throughout 2020 after the Covid-19 pandemic hit the United States a year ago, analysts underestimated the strength of the market rally in 2021.

“One year is such a short period that it’s really hard to predict with precision where the stocks will be in a year,” said Aneet Chachra, portfolio manager at Janus Henderson Investors.

Yet many of the structures that have supported the market will fade over the next year. Gains in 2020 and 2021 were supported by public spending and central bank interventions, including near zero interest rates.

This month, the Fed laid the groundwork for an interest rate hike next spring and approved plans to end a stimulus bond buying program more quickly. The roughly $ 2 trillion Democratic education, health and climate package faces an uncertain future after Sen. Joe Manchin (D., W.Va.) said last week it would oppose it.

Wall Street strategists forecast weaker gains for the S&P 500 in 2022. Among the 13 banks and financial services firms whose analysts have released 2022 guidance, the average target for the S&P 500 to complete next year is of 4940, approximately 4.5% above the index close. Thusday.

At the peak of next year’s projections, BMO Capital Markets strategists predict the S&P 500 will end 2022 at 5,300, 12% above its current level. The BMO team expects the company’s earnings growth to help push stocks higher.

Morgan Stanley strategists, meanwhile, said their central scenario was for the S&P 500 to end the year at 4,400, down 6.9%. They expect price / earnings multiples to fall next year as bond yields rise.

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Lower valuations would be especially important for a stock index like the S&P 500, as it is pulled by large tech stocks which often trade at high multiples. Microsoft Corp.

, Nvidia Corp.

, Apple Inc.,

Alphabet Inc.

and Tesla Inc.

recently accounted for about a third of the benchmark’s gains this year. Tesla traded last week at around 123 times its projected profit over the next 12 months, while Nvidia traded around 58 times.

Profits for large US companies are expected to rise next year, but at a slower pace than this year. Analysts estimate profits of S&P 500 companies will rise 9.2% in 2022, according to FactSet, down from the expected earnings growth of 45% in 2021.

Still, many investors have said earnings are a reason to be confident the market recovery can last.

“It’s easy to find a lot of things that can go wrong,” said Steve Kolano, chief investment officer at BNY Mellon Investor Solutions. “Ultimately, profits drive the stock markets. “

Write to Karen Langley at [email protected]

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