Wall Street takes a cautious tone

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Strategists are beginning to present their stock market forecasts for next year — and many are softening expectations after this year’s double-digit gains.

Against the backdrop of vaccinations, easing of lockdown measures and broad economic reopening, the Standard & Poor’s 500 (^ Salafist Group for Preaching and Combat) by 21.6% in 2021 until the market close on November 30. The blue-chip index more than doubled its counterpart on March 23, 2020.

The S&P 500 is unlikely to repeat these types of returns next year, based on forecasts by a number of experts. With market participants pricing in at least one Fed rate hike, the initial boost from reopening, and monetary and fiscal stimulus waning, the easy gains for this cycle are likely to be in the past. At least one strategist believes that stocks will decline at least modestly next year from current levels.

This is what some strategists expect from the major Wall Street companies for the stock market next year.

DWS Group (Target: 5000): “When it comes to PE multiples, they stand on the shoulders of the bond market.”

The DWS Group expects the S&P 500 index to rise further in the coming year, buoyed by a combination of continued economic growth – if slowing, earnings and economic growth – and a sustained rise in rates.

“Our view on risky assets is, simply put, it should be another good year in 2022,” David Bianco, DWS Group’s chief investment officer for the Americas, said during a December 1 media call. Be comfortable with the idea that interest rates, nominal and real, only rise modestly.”

The company expects to see the S&P 500 index by the end of 2022 at 5,000 points, up 9.5% from closing levels on November 30.

“So far, long-term interest rates have only risen slightly, and long-term real interest rates that are key to PE [price-earnings ratio] Of US stocks and shares around the world, they are still near all-time lows. “When it comes to PE multiples, they stand on the shoulders of the bond market.”

Bianco expects the S&P 500’s PE multiplier, which has been trading at about 22 times current earnings, to continue over the next year. The company also expects total dividends for S&P 500 companies (EPS) to be around $228 for 2022, up 7% from an estimated level of $213 this year. This earnings view assumes that there will be no US corporate tax increases in 2022.

“Our view is that the stock market, the S&P, is very much prized, but our preferences for too long have been digital business — technology, communications, stock growth in general, and a preference for intangible business — we’ve argued that these types of companies are the most important thing,” Bianco said. They actually provide great inflation protection.” This isn’t the 1970s, and we often think the best way to protect against inflation is simply to have the best quality companies. And look for companies that raise productivity, rather than raise prices.”

Bianco also said the company was increasing its weight in the healthcare and financial sectors, with the latter being the beneficiary of higher rates given the possibility of at least one rate hike at the Federal Reserve next year.

Target price as of December 2021

Bank of America (target: 4,600): search for “inflation-protected yield”

The S&P 500 is preparing to end around 2022 compared to current levels, according to Savita Subramanian of Bank of America.

The company’s 2022 forecast expects the index to end next year at 4,600, or just 0.7% higher, compared to closing prices on November 30. That will come along with slowing earnings growth, with earnings per share for the S&P 500 set to rise just 6.5% after that. year, based on Subramanian’s predictions.

Expectations for a higher discount rate serve as one of the main drivers of these expectations, as the expected high price environment in the coming year affects stock valuations. In addition, with interest rates rising, other assets will compete for investor interest next year, Subramanian added.

What happens to the TINA (“there is no substitute” for stocks) argument if the cash return rivals the 1.3% S&P 500 dividend yield, and the 10-year return hits 2% by YE [year-end] 2022? Subramanian said dividend growth needs to keep pace with our theme: an inflation-protected dividend.

“What will we say when we look back today? Perhaps comments similar to what happened in 2000 in hindsight: High expectations, stock allocations on Wall Street reach 20 [percentage points], retail/democratized markets, frenetic IPO activity; First raise the Fed to an overvalued market. And accept the unthinkable: the negative cost of stocks in 100, negative real rates today. “But the last sign of a bubble – the excessive influence of businesses/consumers – has been passed on to the government,” she added.

In terms of which asset classes to prefer, Subramanian said she prefers commodities, then cash, then stocks and then bonds in 2022. She also said she prefers small companies over big stocks and value-for-growth stocks.

Target price as of November 2021

Goldman Sachs (Target: 5,100): “The bull market will continue.”

Corporate profits are set to be The driving force for a further rally in the stock market next year, According to David Kostin, chief US equity strategist at Goldman Sachs. The company expects the S&P 500 to rise to 5,100 by the end of 2022, which is about 11.7% higher than the closing prices of November 30.

A trader looks at a chart on his computer screen while working on the floor of the New York Stock Exchange shortly after the market opened in New York July 11, 2013. Global stock indices rose sharply while the dollar fell on Thursday after Federal Reserve Chairman Ben Bernanke indicated that the Bank The Fed may not be as close to ending its stimulus policy as the markets have been beginning to expect.  Photograph: Lucas Jackson/Reuters.

A trader looks at a chart on his computer screen while working on the floor of the New York Stock Exchange. Photograph: Lucas Jackson/Reuters.

“Earnings growth represents the full return of the S&P 500 Index in 2021 and will continue to drive gains in 2022,” Kostin wrote in a note. “S&P 500 EPS will grow 8% to $226 in 2022 and 4% to $236 in 2023.”

Companies are likely to continue expanding profit margins even as input cost pressures and supply chain challenges persist, Kostin predicted, adding that he expects S&P 500 gross margins to expand another 40 basis points, to 12.6% next year. However, he suggested avoiding investing in companies with high labor costs, and favoring high-margin growth stocks over low-margin or unprofitable growth stocks.

Kostin said that while the economic recovery and commensurate strength in corporate earnings are likely to extend into next year, one major factor will shift in the investment environment in the coming year and put pressure on valuations.

“The Fed will start raising interest rates in July,” Kostin said. “Real interest rates will rise, strengthening the cap on valuation multiples and driving rotation within the stock market.”

“However, other aspects of the current stock market will continue. Real rates will remain negative as they rise, and equity allocations to investors will continue to record highs,” he added. “Contrary to our expectations over the past year, corporate tax rates are likely to remain unchanged in 2022 and rise in 2023. Corporate earnings will grow and share prices will rise. And the stock market will continue.”

Target price as of November 2021

Morgan Stanley (Target: 4,400): ‘OYour main message is centered around multiple deflation

Morgan Stanley thinks stocks will fall next year.

Mike Wilson, chief US equity strategist at Morgan Stanley, sees the S&P 500 fall to 4,400 next year, a 3.7% drop, compared to closing prices on November 30. The biggest driver of the decline will be multiple pressure, with a higher rate environment next year putting pressure on stock valuations as earnings continue to grow at a slower rate.

“As we reflect on our outlook for the year ahead, our main message is around multiple deflation amid continued mid-cycle ratings declines, rising bond yields, and an increase in the economy and earnings. suspicion,” Wilson said in a note. “While overall index earnings remain flat, there will be a greater dispersal of winners and losers and growth rates will slow significantly.”

“While our overall 2023 earnings forecast is in line with the consensus ($245; 8% growth), we believe there is room for significant dispersal — indicating that stock picking will present plenty of opportunity in 2022 even if the index is not a big point.” “Bottom line, 2022 will be more about stocks than sectors or patterns, in our opinion.”

Wilson noted that with higher interest rates next year, bank stocks may benefit and outperform compared to long-term growth stocks that will see valuations more exposed to price pressures. However, he added, “affordable growth and defensive quality must hold.”

“We think the obsession with value versus growth will start to fade as personal risk becomes key,” Wilson said. “Just like in 2021, we can see periods of outperformance in value and growth that depend on the current market position in terms of overall growth and rates. Right now, we have a slight bias towards value due to its high leverage in higher interest rates and inflation, which should be with us even end of the year.”

Target price as of November 2021

Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter: @emily_mcck

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