Last week, the S&P 500 hit its 66th record high of the year, and those who started out the year with a bearish outlook can probably wait until the year is over. In the annual survey of Wall Street Strategists from December 2020, stocks were expected to rise 9% by the end of 2021. The highest target for the S&P 500 was 4800, while the lowest target was 3950. Monday’s close of 4682 in the S&P 500 was 5.6% above the average target at 4433, a 24.9% increase year-to-date.
On a number of topics, the strategist’s view on inflation, monetary policy and COVID-19 has been correct but stocks have still moved higher. One would think that analysts would be more bullish in 2022, but that is not the case. Most have expected a slow down in the economy and earnings for a good part of 2021, but since that has not yet happened, it is impacting their targets for 2022.
Bloomberg’s year-end survey of economists has an average projection of only 3.0% growth from current levels, the “least optimistic outlook behind only 2019 in two decades of data”. In 2019, the S&P 500 was up 28.9%.
So what are their concerns?
Bank of America’s strategist Savita Subramanian says a “1 percentage point [increase] in the discount rate could send the S&P 500 into a tailspin that takes it to 3,600”. In addition to increasing rates, there are concerns over declining US economic growth, and therefore corporate earnings. Some are expecting S&P 500 profit growth will weaken to 8%.
The daily chart of the 10 Year T-Note Yield shows that yields rose significantly on Tuesday, closing at 1.625%. A test of the resistance at 1.687% (line a) is looking more likely, and a breakout would surprise the markets.
On November 9, the yield closed for one day below the support (line b) before turning higher. The daily Moving Average Convergence-Divergence (MACD) lines and the MACD-Histogram are now back to slightly positive, while the weekly indicators also favor higher yields.
Morgan Stanley has one of the more negative outlooks for 2022, as “its base-case target of 4,400 implied downside potential of 5%”. Interestingly, their chief U.S. equity strategist Michael Wilson still expects that earnings for the S&P 500 will be solid, but they are looking for better growth in Europe and Japan.
The STOXX Europe 600 tracks the return of the 600 largest stock exchange-listed companies of 17 European countries, including the United Kingdom. From the November 9 lows, it is up 8.9% as of last Friday’s close. It also formed a doji, so a weekly close below 485 is likely to signal a correction. The weekly MACD lines and MACD-Histogram are just barely positive, but could turn back to negative with two consecutive lower weekly closes.
The weekly chart of Japan’s Nikkei 223 Index does not look as vulnerable over the near term as the STOXX 600. The Index has been in a trading range (lines a and b) for all of 2021. A strong close above the resistance at 30,783 would project a move to the 35,000-36,000 area. The weekly MACD lines for the Nikkei are trying to bottom out, as they are slightly positive.
Turning back to the 2022 projections, not all strategists are negative. Goldman Sachs Group (GS) has a year-end target of 5100. They expect a continued high level of corporate buybacks, with demand from both corporations and individuals for U.S. equities to total $550 billion.
Brian Belski, BMO’s chief investment strategist and issuer of the most bullish 2021 estimate, thinks that the worries of other analysts will push the market higher in 2022, but not as much as in 2021, with a year-end target of 5,300.
Of course, the largest problem with these forecasts is their fixed end date: it is not simply whether the markets will reach these levels in 2022, but rather whether they will close the year at them. If the S&P 500 were to reach 5,300 in June 2022, and then fall to 4,600 by December, most would not reward Brian Belski for his accurate upside target.
We should have forecasts from all of the key strategists by the middle of next month, so stay tuned for continued analysis of the year ahead. In the next few weeks we should have more data to add to the growth versus value debate.