Strategists have begun to deliver their outlooks for the stock market next year — and many are tempering expectations after this year’s double-digit gains.
Against a backdrop of vaccinations, easing lockdown measures and a broad-based economic reopening, the S&P 500 (^GSPC) rose by about 25% in 2021 through market close on Dec. 22. The blue-chip index has also more than doubled from its March 23, 2020 nadir.
The S&P 500 is unlikely to repeat these kinds of returns next year, based on the projections of a number of pundits. With market participants pricing in at least one interest rate hike from the Federal Reserve, and an initial boost from the reopening, and monetary and fiscal stimulus fading, the easy gains for this cycle are likely in the past. And more than one strategist thinks stocks are set to decline at least modestly next year from current levels.
Here’s what some strategists from top Wall Street firms are predicting for the stock market next year.
Oppenheimer strategist John Stoltzfus has struck an especially upbeat tone on stocks for 2022, projecting another year of double-digit gains as economic growth remains robust and policymakers move to address concerns over rising prices.
Oppenheimer’s outlook sees the S&P 500 climbing to 5,330 by year-end 2022. This would represent an about 13.5% increase from closing prices on Dec. 22.
“We suggest that investors not let near-term uncertainty obfuscate progress being made as the central bank adjusts monetary policy to meet higher-than-expected inflation and as the U.S. and global economy navigate current challenges to re-openings posed by COVID-19 variants and supply chain disruptions,” Stoltzfus wrote in a note published on Dec. 20.
“In our view, the noise stemming from negative projections coming from some traders, skeptics, bears and fear-mongers of late should not obscure the signals of progress that have been made societally and economically since the pandemic struck globally in March 2020 through to the current day,” he added.
Stoltzfus noted that the firm remains overweight U.S. equities, while also “maintaining meaningful exposure to both developed and emerging markets on expectations that an economic recovery stateside coming out of the COVID-19 emergency will help boost economic growth around the world and lead to a global economic expansion.”
In terms of sectors, Oppenheimer favors information technology and cyclical stocks over defensive sectors. And in terms of style, Stoltzfus. And for investing style, Oppenheimer said it prefers a barbell approach that includes both value and growth stocks, given the backdrop of what is likely to be rising, but still historically low interest rates next year.
Credit Suisse chief U.S. equity strategist Jonathan Golub is getting more bullish on stocks for 2022.
The firm raised its 2022 S&P 500 price target to 5,200, from the 5,000 seen previously. The updated forecast also predicts another year of double-digit appreciation for the index, with an estimated rise of nearly 11% from closing prices on Dec. 22.
“This constructive outlook is based on robust projections for economic growth in both real and nominal terms, further margin upside in cyclical groups, a pickup in buybacks and a favorable discount rate despite Fed tightening,” Golub wrote in a note.
The firm also raised its 2022 S&P 500 aggregate earnings per share (EPS) forecast to $235, up from the $230 seen previously. The revision assumes that a corporate tax rate increase will not take effect next year out of Washington.
Credit Suisse is Overweight cyclical sectors including energy, materials, industrials and consumer discretionary (excluding internet retailers), given expectations for “robust GDP and inflation” and continued earnings momentum. The firm is market weight “TECH+,” or technology, internet services and internet retail firms.
“We would reevaluate this positioning should the yield curve flatten further, nominal growth fade, or earnings trends reverse,” Golub wrote. “We are downgrading Financials and Health Care to Underweight, on weaker growth prospects in 2022.”
JPMorgan sees stocks building on gains next year, albeit at a slower clip than in the last few years. And with interest rates poised to rise, cyclical areas of the market — both in the U.S. and internationally — are set to be some of the strongest performers, suggested Marko Kolanovic, chief global markets strategist at JPMorgan.
The firm forecasted that the S&P 500 would reach 5,050 by year-end 2022, representing a rise of about 7.5% from closing levels on Dec. 22.
“This represents a smaller percentage appreciation compared to our 2021 forecast; however, we do think international equities, emerging markets and cyclical market segments will significantly outperform and deliver 2-3 times higher returns,” Kolanovic wrote. “The reason for this is our expectation for increasing interest rates and marginally tighter monetary policy that should be a headwind for high-multiple markets such as the Nasdaq.”
“Within the U.S., we like reopening and reflationary themes and beneficiaries of higher bond yields,” he added. JPMorgan expects the yield on the benchmark 10-year note to climb to 2.25% by the end of next year.
“What are the risks to our view? As the recovery runs its course, markets will begin adjusting to tighter monetary conditions, a process that will likely inject volatility,” Kolanovic added. “There are other risks that investors will need to monitor and manage in 2022. They include increased geopolitical tensions in Europe and Asia (in particular related to Ukraine and Iran), a looming energy crisis, uncertainties around high inflation, and the path of monetary policy normalization.”
DWS Group expects the S&P 500 will rise further into next year, supported by a combination of sustained — if slowing, earnings and economic growth — and a contained rise in rates.
“Our view for risk assets is simply, it should be another good year in 2022,” David Bianco, DWS Group chief investment officer, Americas, said during a media call on Dec. 1. “With lower inflation, slowing inflation, we should be comfortable with the idea that interest rates, both nominal and real, only climb modestly.”
The firm expects to see the S&P 500 end 2022 at 5,000, growing by nearly 6.5% from closing levels on Dec. 22.
“So far, long-term interest rates have only climbed slightly, and long-term real interest rates which are key for the PE [price-earnings ratio] of U.S. equities and equities worldwide, they’re still near all-time lows,” he added. “When it comes to PE multiples, they stand on the shoulders of the bond market.”
Bianco expects the S&P 500’s PE multiple, which has been trading at about 22 times current earnings, will be sustained through next year. The firm also anticipates S&P 500 companies’ aggregate earnings per share (EPS) will come in at about $228 for 2022, growing by 7% from an estimated $213 level this year. This earnings view assumes no corporate tax hikes in the U.S. in 2022.
“Our view is that the equity market, the S&P, is largely fairly valued, but our preferences for a long time have remained the digital businesses — technology, communications, growth stocks in general, a preference for intangible businesses — we’ve argued that these types of businesses actually do provide terrific inflation protection,” Bianco said. “This is not the 1970s, and often, we think the best way to protect against inflation is simply to own the best quality businesses. And look for businesses that are raising productivity, rather than raising price.”
Bianco also said the firm was Overweight the health care and financials sectors, with the latter constituting a beneficiary of higher rates given the likelihood of at least one Federal Reserve interest rate hike next year.
The S&P 500 is poised to end 2022 slightly lower compared to present levels, according to Bank of America’s Savita Subramanian.
The firm’s 2022 outlook sees the index ending next year at 4,600, or down by 2% compared to closing prices on Dec. 22. That would come alongside slowing earnings growth, with S&P 500 earnings per share set to rise just 6.5% next year, based on Subramanian’s projections.
Expectations for a higher discount rate serve as one of the main drivers for this outlook, with next year’s predicted higher-rate environment weighing on stock valuations. Plus, as rates rise, other assets will compete for investor attention next year, Subramanian added.
“What happens to the TINA (‘There is no alternative’ to stocks) argument if cash yields rival the S&P 500’s 1.3% dividend yield, and the 10-year yield hits 2% by YE [year-end] 2022? Dividend growth needs to keep up, thus, our theme: inflation-protected yield,” Subramanian said. “Inflation-protected yield favors Energy, Financials and Real Estate.”
“What will we say when we look back at today? Probably similar comments to 2000 hindsight: lofty expectations, Wall St. stock allocations up ~20 [percentage points], retail/democratized markets, frenzied IPO activity; first Fed hike into an overvalued market. And acceptance of the unthinkable: a negative cost of equity in ’00, negative real rates today.” she said. “But the last sign of a bubble — excessive corporate/ consumer leverage — has been transferred to the government.”
In terms of asset classes to favor, Subramanian said prioritize commodities, then cash, then stocks and then bonds in 2022. She also said she prefers small caps versus large caps and value stocks versus growth.
Corporate profits are set to be the driving force for a further rise in the stock market next year, according to David Kostin, Goldman Sachs’ chief U.S. equity strategist. The firm expects the S&P 500 to climb to 5,100 by the end of 2022, marking a nearly 9% rise from Dec. 22’s closing prices.
“Profit growth has accounted for the entire S&P 500 return in 2021 and will continue to drive gains in 2022,” wrote Kostin in a note. “S&P 500 EPS will grow by 8% to $226 in 2022 and by 4% to $236 in 2023.”
Companies will likely continue to expand profit margins even as input cost pressures and supply chain challenges linger, Kostin predicted, adding that he expects aggregate S&P 500 company profit margins to expand by another 40 basis points to reach 12.6% next year. Still, he suggested avoiding investing in firms with high labor costs, and favoring growth stocks with high margins over low-margin or unprofitable growth stocks.
While the economic recovery and commensurate strength in corporate profits will likely extend into next year, one key factor will shift in next year’s investing environment and apply pressure to valuations, Kostin said.
“The Fed will begin to hike rates in July,” Kostin said. “Real interest rates will rise, solidifying the ceiling on valuation multiples and driving rotations within the equity market.”
“However, other aspects of the current equity market will persist. Real rates, while rising, will remain negative, and investor equity allocations will continue to establish record highs,” he added. “In contrast with our expectation during the past year, corporate tax rates will likely remain unchanged in 2022 and rise in 2023. Corporate earnings will grow and lift share prices. The equity bull market will continue.”
Morgan Stanley thinks stocks are going down next year.
Mike Wilson, Morgan Stanley chief U.S. equity strategist, sees the S&P 500 dipping to 4,400 next year, representing a drop of 6.3%, compared to Dec. 7’s closing prices. The biggest driver of the dip will be multiple compression, with a higher-rate environment next year pressuring stock valuations as earnings growth continues at a slower rate.
“As we think about our forecasts for the year ahead, our key message centers around multiple contraction amid a continued mid-cycle de-rating, higher bond yields, and greater economic and earnings uncertainty,” Wilson said in a note. “While earnings for the overall index remain durable, there will be greater dispersion of winners and losers and growth rates will slow materially.”
“While our overall earnings forecast for 2023 is about in-line with consensus ($245; 8% growth), we believe there is scope for significant dispersion — suggesting stock selection will provide plenty of opportunity in 2022 even if the index doesn’t do much point to point,” he added. “Bottom line, 2022 will be more about stocks than sectors or styles, in our view.”
As interest rates set to move higher next year, bank stocks may benefit and outperform relative to long-duration growth stocks that would see valuations most pressured by rising rates, Wilson noted. However, “reasonably priced growth and defensive quality should hold up” as well, he added.
“We think the obsession with Value vs. Growth will start to die down as idiosyncratic risk becomes the key,” Wilson said. “Much like 2021, we could see periods of Value and Growth outperformance that is dependent on the market’s current posture regarding macro growth and rates. For the moment, we have a slight bias toward Value given its higher leverage to rising interest rates and inflation, which should be with us through year-end.”