Global markets: Wall Street pessimists miss the forecast badly for stocks

Investors limited the week amid irrefutable evidence of price pressure in the economy amid a market rally that has sent the S&P 500 up 25% in 2021. Then retail sales jumped the most in seven months, with Home Depot Inc. posting stellar results and regional manufacturing measures outpacing previous forecasts. Barely a week after the sharpest jump in consumer prices in three decades, the S&P 500 hit its 66th record of the year on Thursday.

Wall Street forecasters have been saying all year that a recession in a 20-month bull market would be natural, with valuations rising, growth forecast to slow and the Federal Reserve expected to hike interest rates in 2022. But so far in the fourth quarter, consumers continue to defy pessimism. A Fed model of economic growth is on track to surpass nearly all estimates in a Bloomberg survey of economists

“The recovery in 2021 was much faster than anyone predicted,” Chris Gaffney, president of world markets at TIAA Bank, said in a phone interview. “It’s realistic to think that markets won’t be able to replicate 2021, which will go down as a very good year.”

When it comes to 2022, resilience is doing little to stave off gloom among strategists. The average projection for the S&P 500 at the end of 2022 is 4,843, representing only a 3% advance from current levels. It counts as the least optimistic outlook in two decades of data, only behind 2019.

Watch out for an unconventional recovery among the normally bullish group that has wreaked havoc with forecasts. Take the fresh week, when many were convinced that strained supplies would hamper growth. Instead, retailers were bragging about their ability to build inventory ahead of the holidays. And jobless claims fell to a new pandemic-era low, a sign of a still strong labor market.

The stock advanced for the sixth week in seven, with the S&P 500 up 0.3%. As countries in Europe announced new travel restrictions amid a new wave of pandemic cases, investors again sought protection in the common beneficiaries of the economy of stay – software and internet stocks. The tech-heavy Nasdaq 100 outperformed, jumping more than 2%.

Strategists are not the only ones finding it difficult to predict during the pandemic. Single-stock analysts have observed that companies outperform average estimates of earnings per share by an unprecedented amount. Economists and central bankers have viewed inflation as “temporary” against several months of buoyancy in consumer prices.

Finally, stock pessimists are almost certainly looking forward to a year where their forecasts for equities miserably missed. The year-end target was 4,400 in January. The S&P 500 closed just below 4,700 on Friday.

Being wrong about the pace of recovery in 2021 has not fueled optimism among strategists for 2022. They now see a projected slowdown in economic growth expected next year, with gains hampered by the Fed’s tighter cycle that could include the first rate. increase since the pandemic began.

With such a high rise in equities in the future, the market has become unusually sensitive to interest rate hikes, according to Savita Subramaniam, strategist at Bank of America Corp. A 1 percent increase in the discount rate at his team’s model shows could send the S&P 500 into a tailspin that takes it to 3,600. On the other hand, a similar sized rate fall would push the stock benchmark to 6,300.

Subramaniam, who expects the S&P 500 to end 2022 at 4,600, wrote in a recent note to clients, “A small increase in the discount rate could impact equities.” “But we cannot ignore the opposite scenario.”

Helping to cushion this year’s $12 trillion stock rally is a string of corporate earnings that have allayed concerns from supply-chain malfunctions to labor shortages and commodity inflation. Over 40% in each of the first three quarters accounted for all share gains, rather than profit, price-earnings multiples.

However, such a surge is unlikely to last, the forecaster says. Analysts compiled by Bloomberg Intelligence show that S&P 500 profit growth will weaken to about 8% in 2022. While this does not necessarily cause trouble for the market, it does threaten to remove some of the buffer if rates start to creep up.

Ned Davis Research compared the S&P 500’s earnings yield — how large a profit is relative to share prices — to inflation-adjusted 10-year Treasury yields, and found that the lower premiums that stocks offer on bonds, the more they are. Only perform poorly. Since 1984, when the spread was below its 12-month average, the S&P 500 has risen 7.3% annually. When the spread was above the mean, it is 4 percentage points behind the returns. At the end of October, the difference was close to its average.

The risk of potentially higher rates putting pressure on equity P/E ratios is partly why Morgan Stanley sees the S&P 500 finish at 4,400 next year, a forecast that is the lowest among those tracked by Bloomberg.

“We’re still forecasting 10% earnings growth. The major linchpin in the equation is interest rates,” Daniel Scally, head of equity model portfolio solutions at Morgan Stanley, said in an interview on “Bloomberg Monitoring.” “We think the risk-reward is unclear at the index level at this point.”

Not everyone is a pessimist though. Equity bulls point to favorable trends in money flow as a reason to stay invested. Thanks to zero commissions at brokers and the pandemic lockdown, a new generation of retail traders has emerged to help propel the market.

Another pillar of support comes from corporate buybacks. US firms have announced plans to buy $1.1 trillion of their own shares from January, nearly triple the level at this time last year, and set to surpass the record set in 2018 by Birini Associates. And data compiled by Bloomberg shows.

Goldman Sachs Group Inc. According to estimates by U.S. strategist David Kostin, the aggregate demand for equity from corporations and households will total $550 billion in 2022. He expects the S&P 500 to end the year at 5,100.

For Brian Belsky, BMO’s chief investment strategist, all concerns of a growth slowdown or the Fed tightening set the stage for the bull market to continue.

Belsky wrote in a note earlier in the week, “We do not believe the returns recorded in 2020-2021 are sustainable. 2022 will be a year less positive, yet positive, yet again. Think of this as a much-deserved relief.” types of.”

This story has been published without modification in text from a wire agency feed. Only the title has been changed.