‘Proceed with warning’: here is what Wall Road analysts see for the U.S. inventory market in 2022

The latest spike in market volatility could herald a bumpier U.S. inventory market in 2022, as buyers come to grips with an inflection level in financial coverage within the pandemic.

“There most likely can be some elevated volatility across the potential tightening of Fed coverage,” stated Shawn Snyder, head of funding technique at Citigroup’s U.S. client wealth administration division, in a telephone interview. “Omicron throws in a little bit of a wrench” to the 2022 outlook, he stated of the brand new variant of the coronavirus, although buyers have appeared inspired by some early indicators that it could be much less harmful than initially feared.

The CBOE Volatility Index
or VIX, jumped in late November and stays above its 200-day shifting common even after subsiding since final week, in response to FactSet information. The VIX broke above 30 final week for the primary time for the reason that first quarter of 2021, the info present, amid market jitters over the emergence of omicron and the potential transfer by the Federal Reserve to take away some lodging from the market quicker than buyers had anticipated.

“That’s an enormous transition that creates stress for buyers,” stated Lauren Goodwin, economist and director of portfolio technique at New York Life Funding, in a telephone interview. The Fed seems to be to be positioning for extra flexibility for potential rate of interest hikes subsequent yr, with elevated inflationary strain more likely to imply extra fee rises in 2022 than at present anticipated, creating extra market threat, she stated.

Some buyers fear that curiosity rate-sensitive progress and expertise shares could be notably susceptible ought to the Fed aggressively tighten its financial coverage via fee hikes. The S&P 500 index,
which has a big publicity to tech, is on monitor for a 3rd straight yr of sturdy positive aspects after rising virtually 25% in 2021 via Tuesday, in response to FactSet.

The U.S. inventory market will most likely ship extra modest positive aspects “accompanied by larger volatility” subsequent yr, Jeffrey Kleintop, chief international funding strategist at Charles Schwab, informed MarketWatch by telephone.

Goodwin stated she additionally expects elevated volatility, amid transitions that embody the fading of the fiscal stimulus that supplied direct help to customers throughout the COVID-19 disaster and the Fed taking its “foot off the fuel” within the financial restoration. She expects “a lot decrease” stock-market returns subsequent yr in comparison with positive aspects to this point in 2021.

“A lot of the fairness upside needs to be realized between now” and the primary half of 2022, “when financial and financial coverage tailwinds can be strongest,” JPMorgan Chase & Co. strategists stated in a 2022 outlook report Wednesday.

Wall Road banks have been rolling out their 2022 forecasts for the S&P 500, with Goldman Sachs Group and JPMorgan being among the many most bullish on U.S. shares. 

Goldman expects the S&P 500 will finish 2022 at 5,100, in response to a portfolio technique analysis report from the financial institution dated Dec. 3. In the meantime, JPMorgan analysts predicted in a analysis report on the finish of November that the U.S. inventory benchmark will rise subsequent yr to five,050, partly on “strong earnings progress” and easing provide chain woes. RBC Capital Markets has forecast the identical worth goal as JPMorgan, whereas Deutsche Financial institution predicts the S&P 500 will finish subsequent yr at 5,000, in response to a slide presentation from its chief funding workplace. 

In the meantime, Citigroup set an S&P 500 goal of 4,900 for the tip of 2022, a analysis report from the financial institution in late October exhibits. Coming in beneath that degree, Barclays predicted in a U.S. fairness technique report this month that the index will end subsequent yr at 4,800.

“Proceed with warning,” the Barclays analysts wrote of their 2022 outlook report dated Dec. 2. “We see restricted upside for equities subsequent yr,” they stated. Of their view, “family and company money hoards ought to help modest earnings progress however persistent provide chain woes, reversal of products consumption to pattern and China hard-landing are key tail dangers.” 

Financial institution of America’s analysts have a lower cost goal than Barclays for the S&P 500 subsequent yr, with a BofA International Analysis report final month displaying the benchmark will finish 2022 at 4,600. 

“Sadly we see a number of similarities between right this moment and 2000 — the tech bubble peak,” stated Savita Subramanian, head of fairness and quant technique at BofA, throughout a late November media briefing on their U.S. inventory market outlook.

See: S&P 500 could finish ‘fairly flat’ in 2022 amid beforehand ‘unthinkable’ damaging actual charges, says BofA strategist

Morgan Stanley has a extra bearish outlook for subsequent yr that places the S&P 500 beneath the index’s shut Tuesday at 4,686.75. A report Monday from the financial institution’s wealth administration division exhibits a base-case forecast of 4,400 for the S&P 500 on the finish of 2022 even with an anticipated acquire in earnings.

“We anticipate the S&P 500 to be range-bound and risky, and bond returns to be damaging web of inflation,” stated Lisa Shalett, chief funding officer at Morgan Stanley Wealth Administration, within the observe. “Mounted earnings needs to be decreased to fund higher publicity to actual property and to absolute return funds.”

The core of Morgan Stanley’s “cautious” view on the S&P 500 relies on price-to-earnings ratios sometimes compressing throughout “a midcycle transition,” Shalett stated. She pointed to a chart in her observe displaying that “median inventory has traversed the midcycle transition.”


The chart exhibits “the median S&P 500 inventory has corrected 15% from its 52-week excessive,” however the index has been stored aloft by the 15 largest firms now accounting for 40% of its market capitalization, in response to her observe. 

“Whereas they might be nice firms, we’re much less satisfied they may all be nice shares in 2022 as monetary circumstances tighten, rates of interest rise, employment prices improve and inflation stays difficult,” Shalett stated. “We predict revenue margins for the highest 15 have peaked.”

In Morgan Stanley’s view, “this implies buyers ought to transfer towards inventory selecting and away from passive index funds,” her observe exhibits. 

JPMorgan expects that “worldwide equities, rising markets and cyclical market segments will considerably outperform,” in response to its report Wednesday.

“The rationale for that is our expectation for rising rates of interest and marginally tighter financial coverage that needs to be a headwind for high-multiple markets such because the Nasdaq,” the JPMorgan strategists wrote, citing the tech-laden Nasdaq Composite Index

Citi’s Snyder informed MarketWatch that in “midcycle” he likes high-quality shares, “dividend-growers” and international healthcare  equities. Constant earnings progress and “cheap valuations” make healthcare enticing, he stated, and inventory bets within the space can function “a volatility dampener” in portfolios.

Immunology is certainly one of three megatrends poised to speed up subsequent yr as “a variety of next-gen oncological therapeutics come up for approval and allow extra focused most cancers therapy,” in response to Jeff Spiegel, head of U.S. iShares megatrend and worldwide ETFs. Shares of the iShares Genomics Immunology and Healthcare ETF
had been up about 0.2% this yr based mostly on noon buying and selling Wednesday, FactSet information present, eventually verify.

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Two different megatrends to observe in 2022 are “digital transformation” intensifying via the cloud, 5G and cybersecurity, and “automation applied sciences” corresponding to robotics and synthetic intelligence, Spiegel wrote in a report this month. Automation applied sciences ought to develop “in response to ongoing provide chain bottlenecks and wage inflation” within the pandemic, he wrote.

“I feel we’ll truly be coping with gluts subsequent yr quite than shortages,” stated Charles Schwab’s Kleintop. “That can assist drive down inflation, notably within the second half of subsequent yr, making an aggressive path of fee hikes unlikely.”

The market is anticipating three fee hikes by the U.S. central financial institution in 2022 after Fed Chair Jerome Powell signaled final week that it could pace up the tapering of its month-to-month asset purchases, stated Deepak Puri, Deutsche Financial institution’s CIO for the America, throughout a media briefing Monday on his outlook for subsequent yr.

Whereas the Fed could turn into extra aggressive in tapering its bond purchases, probably finishing the method in March as a substitute of June, stated Puri, he expects the Fed will nonetheless be “dovish” on charges subsequent yr. Puri forecasts that the Fed will elevate charges simply as soon as subsequent yr, which is beneath consensus, he stated.

“We anticipate two fee hikes subsequent yr,” stated New York Life Funding’s Goodwin.

Morgan Stanley’s Shalett wrote in her 2022 outlook observe that “we see a traditional reflationary rebalancing during which larger nominal and actual charges replicate larger common progress and inflation charges.” She additionally expects yield curves will steepen, revenue margins to be squeezed by rising prices, and price-to-earnings ratios to compress in “rate-sensitive sectors.” 

“Inside the U.S., we like reopening and reflationary themes and beneficiaries of upper bond yields,” JPMorgan stated in its report Wednesday. The financial institution’s strategists anticipate the yield on the 10-year Treasury observe
will rise to 2.25% by the tip of subsequent yr, the report exhibits.

“Our view is that 2022 would be the yr of a full international restoration, an finish of the worldwide pandemic, and a return to regular circumstances we had previous to the COVID-19 outbreak,” Marko Kolanovic, chief international markets strategist at JPMorgan, and the financial institution’s international co-head of analysis Hussein Malik wrote within the report Wednesday.

In keeping with Shalett, “on most counts, 2022 can be a vital yr when the imbalances wrought by the worldwide pandemic start to resolve and the enterprise cycle normalizes from extremes.”

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