The year is slowly running its course and as December looms just around the corner, more and more institutions are issuing their equity strategies for next year. Before we dive into the next year’s predictions though let’s quickly have a run through what was up so far on equity markets in 2021:
✅ YTD performance of major equity indices (as of writing 23rd Nov): $SPX500 +24% $DJ30 +16,5% $NSDQ100 +25,1% Nasdaq Composite +21,1% Global Dow +16,3% Stoxx Europe 600 +20,1% GER40 +16,2% CAC40 +26,9% UK100 +12,5% Nikkei225 +8,5% HangSeng -9,5%
* Clear outperformance seen in US and EU equities over Asian markets, with China being the biggest loser due to mutliple reasons, the regulatory crackdown being in the front.
* Clear outperformance of Growth vs. Value (for simplicity measure by Nasdaq vs. DJ30) within US. Still, there’s been periods of relatively big rotation from tech stocks into cheap reopening stocks, especially during sharper moves higher in treasury yields (especially in 1H21).
✅ Current P/E valutations for major US indices:
————————————TTM——-NTM——-DY
$SPX500——————–28,9x…….22,4x…..1,28%
$DJ30————————22,1x…….18,5x…..1,91%
$NSDQ100—————–36,1x…….30,5x…..0,63%
* US blue-chips trade at the most attractive forward P/E, whilst the technology stocks valuations see relatively streched.
* Only the DY for $DJ30 is higher than current 10Y Treasuty yield of appx 1,65%, which generally makes stocks less attractive on relative basis to bonds.
* Judging by the two points above, one can assume that with general expectations of higher interest rates next year (Fed raising rates) and Value stocks being attractively priced, they can generally be a safer play for 2022 than Growth stocks.
✅ Major equities themes of 2021 so far:
* Buy and hold was still the best investing strategy for equities in general, just as it was starting 2H20, after the Covid downtrun and the launch of unlimited QE and fiscal support.
* Equities going higher were decisevly supported by a very strong economic rebound (+4,9% annual growth rate as per Sept/21) and EPS growth (+47,3% YoY for End2021 according to Yardeni Reasearch on a market consensus basis).
* The market was switching from a stay-at-home mode (1H21) into the full reopening mode (2H21) throughout the year, which had substantial impact on capital flows from tech stocks into old economy stocks as they year progressed. Still tech space did generally very well, given the YTD performance.
* Growing and persistant inflation and the central bank’s ignorance against it was by far the hottest issue (and continues to be as the year ends slowly), raising fears of a potential sudden catch-up the Fed might be made to do next year or 2023, should inflation still be such a problem. A sudden move higher in Fed Funds would be a burden both for equity valuations and the amounts of debt interest that Washington (and other governments) would have to carry. This awakens natural recession fears.
So what’s out there for 2022? 🤔
There seems to be a growing schism about the outlook for equites with some houses staying very bullish and some others calling the $SPX500 to be down for the year in 2022 (calculated from current levels). Here’s a short list of current End2022 $SPX500 calls from some major houses:
$BAC (Bank of America Corp): 4 600 pts. (2% downside) “Too many similarities between today and 1999/2000 to ignore. Those parallels include negative real rates, surging inflation and a hot IPO market.”
$MS (Morgan Stanley): 4 400 pts. (6% downside) “Slowing earnings growth, rising bond yields and supply chain disruptions are potential headwinds.”
Goldman Sachs: 5 100 pts. (9% upside) “Gains should be driven by continued strong earnings growth, consistently expanded profit margins despite input cost pressures and supply chain challenge.”
JP Morgan: 5 000+ pts. (7% upside) “Supply chain pressures are easing and should allow equities to continue to deliver strong revenue growth and record margins”. “Even for the cohort that faces meaningful disruptions, we expect these issues to largely abate by 2H22, resulting in delayed revenues rather than demand destruction.”
✅ The most reasonable prediction for 2022
The most up-to-date End2022 consensus EPS estimate for $SPX500 stands at 221,72** (implying a 7,7% YoY growth). If you multiply it by the current NTM P/E of 22,4x, you arrive at the End2022 index level of
4 966,5 pts. Assuming no recession in 2022 and no general repricing of equities, there’s still upside in the US equities for 2022.
GlobalAlphaS
cnb.cx/32xxEr3
** Yardeni Research (www.yardeni.com/pub/yriearningsforecast.pdf)
Disclaimers: None of the ideas, views and thoughts presented here shall ever be taken as a recommendation to buy or sell stocks,bonds,FX,commodities or any other financial instruments as stated in REGULATION (EU) No 596/2014 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 16 April 2014 on market abuse (market abuse regulation) and repealing Directive 2003/6/EC of the European Parliament and of the Council and Commission Directives 2003/124/EC, 2003/125/EC and 2004/72/EC or the Polish Act of 10 February 2017 amending the act on trading in financial instruments and some other acts. The article is for educational reasons and purely presents private views of the author, thus the author shall not be held accountable for any losses of a third party resulting from any potential trading activities in any instruments, both specifically or by category of assets. The author uses his best knowledge and data from sources believed to be reliable, but makes no representations as to the accuracy of the data.Full Disclaimers&Liability Limitations page.
