Darren Letts
Equity Dealer
3 Dec, 2021

US Equities

It has been a good year for an international equity investor, particularly if you were overweight US exposure. Based on major investment bank expectations, the strength in global equities will continue into 2022.

Goldman’s Portfolio Strategy team forecast the S&P 500 index will climb a further 13% to 5,100 at year-end 2022, reflecting a prospective total return of 14% including dividends from current levels.

Profit growth has accounted for the entire S&P 500 return in 2021 and it will continue to drive gains in 2022. S&P 500 Earnings Per Share (EPS) will grow by 8% to $226 in 2022 and by 4% to $236 in 2023 (represented in the chart below).

That earnings growth will maintain the index P/E multiple roughly flat ending, 2022 at 21.6X. There will be no multiple expansion as we’ve had two years of near zero interest rates and the expectation is that the Fed will likely begin hiking in July, tempering animal spirits for equity markets.

It’s a natural expectation to be cautious after a strong year, but Goldman’s analysis indicates that investors stay the course.

The stellar approx. 20% (closer to 30% in AUD terms) return year to date is not a good reason in itself to expect a weak return in 2022. Since 1900, the S&P 500 has generated an average 12-month return of 10%.

Returns have averaged slightly better than that (+11%) following 12-month gains exceeding 20%, and only slightly lower (+9%) following 24-month gains exceeding 50%.

Households and corporations will be the key sources of demand for US equities in 2022.

Households own 50% of the total $28 trillion in US cash assets, an increase of $3 trillion since before the pandemic. Goldman’s expect households will continue the trend to increase equity exposure, shifting this capital at a growing rate.

On the corporate side, cash/asset ratios stand at record highs, and this year has witnessed record buyback authorizations exceeding $1 trillion USD. Foreign investors will also be net buyers ($100 billion) while mutual and pension funds will collectively be net sellers of $400 billion.

The above assumptions have one important caveat – a benign inflation environment. Alternatively, worse-than-expected inflation pressures could weigh on consumer demand, damage profit margins, and lead to a more aggressive Fed than is currently priced into equity valuations. This would lead to zero earnings growth in 2022 alongside a large decline in valuations – a scenario few expect currently. 

European Markets

Looking at Europe and the UK, the outlook is equally upbeat as their economies rebound post the pandemic slowdowns. According to Citibank’s strategy team, operating cashflow for European listed companies will hit an all-time high this year, with continued growth forecast in 2022. This has meant 2021 is on track to be the first year since 2012 when total European listed company capex grows by double digits (+13%). In 2022 the forecast is to see a 6% rise with the year’s prior spend showing its benefits.

Semiconductor companies are expected to lead the way. The Autos and Mining sectors are likely to invest heavily in ESG-related endeavors. Citi expect buybacks to catch up in 2022, rising 30%. Consumer, Luxury and Mining stocks should be prominent buyers of their own shares. Citibank prefers an index allocation to the UK over Europe though in 2022 forecasting over 10 percent gains for the FTSE100 from current levels.

COVID’s Impact

As a close, I will leave you with a view from JP Morgan’s Chief Global Strategist, Marko Kolanovic, on the new COVID variant, Omicron.

Data is sparse and at time contradictory with media highlighting worst case scenarios. Despite Omicron being around for several weeks, a media blitz happened on Thanksgiving evening, one of the lowest points of market liquidity for the whole year, prompting a crash in various assets sensitive to global growth and recovery such as oil (WTI).

 A second blow to markets was delivered shortly after, also in the middle of night in the U.S. (Monday midnight), when the Moderna’s CEO said that vaccines are less likely to be effective on this variant. That story that was later largely invalidated by reports from Pfizer, Oxford, the WHO, and the Israeli Health Ministry. Most International clients of JPM are not worried about Omicron itself, but the reaction of governments.

To conclude on a direct quote from the JPM team:

“While it is likely that Omicron is more transmissible, early reports suggest it may also be less deadly – which would fit into the pattern of virus evolution observed historically. Should these trends be confirmed in the coming weeks, could the Omicron variant ultimately prove to be a positive for risk markets, in the sense that it could accelerate the end of the pandemic? If a less severe and more transmissible virus quickly crowds out more severe variants, could the Omicron variant be a catalyst to transform a deadly pandemic into something more similar to seasonal flu? That development would fit with historical patterns (duration and number of waves) of previous respiratory virus pandemics, especially given the broad availability of vaccines and new therapeutics that are expected to work on all known variants (Pfizer, Merck). If the market were to anticipate that scenario – Omicron could be a catalyst for steepening (not flattening) the yield curve, rotation from growth to value, selloff in COVID and lockdown beneficiaries and rally in reopening themes. As such, we view the recent selloff in these segments as an opportunity to buy the dip in cyclicals, commodities and reopening themes, and to position for higher bond yields and steepening.”

The views expressed in this article are the views of the stated author as at the date published and are subject to change based on markets and other conditions. Past performance is not a reliable indicator of future performance. Mason Stevens is only providing general advice in providing this information. You should consider this information, along with all your other investments and strategies when assessing the appropriateness of the information to your individual circumstances. Mason Stevens and its associates and their respective directors and other staff each declare that they may hold interests in securities and/or earn fees or other benefits from transactions arising as a result of information contained in this article.