Analysis-After another stunning US stock market year, investors wonder how much gas is left

FILE PHOTO: People are seen on Wall Street outside the NYSE in New York
FILE PHOTO: People are seen on Wall Street outside the New York Stock Exchange (NYSE) in New York City, U.S., March 19, 2021. REUTERS / Brendan McDermid / File Photo

December 23, 2021

By Lewis Krauskopf

NEW YORK (Reuters) – The U.S. stock market is expected to deliver three times annual returns, but the possibility of a similar performance in 2022 could be threatened by a belligerent Federal Reserve. war, slowing income growth and a relentless pandemic.

With just over a week left in the year, the S&P 500 is on track to gain 87% since the end of 2018, the best performance in three years in more than two decades. The benchmark index is up 25% so far in 2021 after double-digit returns in the previous two years.

If history is any guide, next year’s gains could be less impressive, though not necessarily bad.

According to Jessica Rabe, co-founder of DataTrek Research, the S&P 500 has posted double-digit returns for three consecutive years, nine times since 1928.

DataTrek found that year-over-year returns after such periods were weaker on average, averaging 8.4%, compared with its overall average return of 11.6%, DataTrek found. The stock rose in five of those nine years and fell in the other four.

“The likelihood of this kind of positive momentum in the coming year is a coin toss,” Rabe said in emailed comments to Reuters. “But the S&P’s performance has historically proven disproportionate as positive returns far outweigh negative returns in the fourth year.”

A Reuters poll of strategists earlier this month predicted the S&P 500 will end 2022 at 4,910, up 4.5 percent from Wednesday’s close.

The Fed’s three expected rate hikes in 2022 – a more positive path than the market had expected weeks ago – will be in the focus of investors, threatening to raise bond yields and cut relatively risky assets such as stocks.

But the economic growth that is prompting the central bank to raise interest rates could also help boost equities.

The S&P 500 returned an average of 7.7% the first year the Fed raised rates, according to a Deutsche Bank study of 13 bull cycles since 1955.

“We still see a good environment for equity investors in 2022, although we don’t expect the kinds of returns that we expect,” said James Ragan, director of wealth management research at DA Davidson. we have seen”. growth of the S&P 500 in 2022.

Ragan likes sectors that will particularly benefit from a solid economy, such as finance, industrials and materials, as well as companies that can weather price increases in an inflationary environment.

“We think it’s still a good overall GDP growth environment that will allow companies to still grow earnings, but we’re concerned about the valuation,” Ragan said.


Rising bond yields, which tend to be accompanied by higher interest rates, can put pressure on an already lingering stock valuation, as corporate cash flows are expected to be discounted at a higher rate. in standard stock pricing models.

The S&P 500 index trades at about 21 times earnings estimates for the next 12 months, compared with a historical average of 15.5 times, according to Refinitiv Datastream, according to Refinitiv Datastream.

S&P 500 company profits are expected to grow 8.3% next year, after recovering nearly 50% in 2021, according to Refinitiv IBES, according to Refinitiv IBES.

“Earnings growth and revenue growth should be enough to drive the stock market higher, but the risk is if they disappoint,” said Michael Arone, chief investment strategist at State Street Global Advisors. .

The earnings picture is also clouded by uncertainties over COVID-19, because of the Omicron variant omicron-variant-2021 -12-14 is held around the world. While investors doubt the widespread US government shutdown related to the virus will return, consumers “may spend more cautiously amid the increase in new Covid-19 infections”, according to the report. According to a recent note by Oxford Economics, consumer spending is forecast to grow 4.3% in 2022 after a record 8.1% growth this year.

Another wild card for investors will be the US midterm elections in November, with Congressional control by President Joe Biden’s Democratic Party seen as fragile.

Whether technology and growth stocks, which have led the US market for most of the past decade, can maintain their strength remains to be seen. For example, those stocks are particularly sensitive to higher yields because their valuation is more dependent on future earnings.

The broader markets could struggle if giant growth stocks fall. Profits in six companies – Microsoft Corp, Apple Inc, Google parent Alphabet Inc, Nvidia Corp, Tesla Inc and Meta Platforms Inc, formerly Facebook – account for about a third of the total S&P 500 profits in 2021 through the end of the year. on Tuesday, according to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.

“We could start to see underperformance in the tech sector and outperformance in undervalued areas,” said Andre Bakhos, managing director at New Vines Capital LLC in Bernardsville, New Jersey. than. “By the nature and design of the S&P, you will probably get a lower market.”

(Reporting by Lewis Krauskopf in New York; Editing by Ira Iosebashvili, Megan Davies and Matthew Lewis) Analysis-After another stunning US stock market year, investors wonder how much gas is left

Bobby Allyn

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