The stock market will be flat in 2022. Where they see buying opportunities.


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Bank of America strategists believe the United States will raise interest rates as the stock market is stable in 2022.

David Paul Morris / Bloomberg

Bank of America

Experts said Monday they expected to see three rate hikes in the United States and a stable stock market in 2022. But they said parts of the stock market were still worth buying.

In a Monday webinar, Michelle Meyer, head of the US economy at Bank of America, predicts that gross domestic product will be 6% higher in 2021 compared to last year, and will grow another 4% in 2022 and 2% in 2023.

Inflation is likely to subside next year, but Meyer believes it will stay well above target, prompting the Federal Reserve to act. The central bank will likely start raising interest rates from June of next year, said Meyer, who expects three hikes in 2022, four in 2023 and one more in 2024.


S&P 500

companies are expected to increase their profits by 6.5% next year, but the index is likely to remain stable from the current level, hovering around 4,600 points by the end of 2022, said Savita Subramanian, manager US equity and quantitative strategy and ESG research at the Bank. from America.

Over the next decade, she expects the S&P 500 to post negative price returns and dividends to become a larger part of investor returns. Dividends have contributed almost a third of total market returns over the past 100 years, but Subramanian believes the ratio could reach even higher in the years to come.

Dividend growth has not caught up with the massive earnings recovery since 2020, as companies remain cautious about distributing cash in a less certain environment. But that will likely change as investors demand more returns in a flat market.

“Price returns alone are unlikely to get you where you want to be in the next 10 years,” Subramanian said. “Prepare for a world of full return. In 2022 alone, she expects S&P 500 companies to increase their dividends by 13%.

On the other hand, share buybacks are likely to decline, with share prices remaining at record highs. Fewer buyouts, along with a growing number of public offerings today, would create more inventory and reduce demand. This is another factor that could keep stock prices capped.

Despite the many similarities between the current market and the tech bubble of the early 2000s, Subramanian sees a big difference: today’s bubble is not in stocks, but in bonds: “There are still stocks that are going to do well this year, you want to avoid stocks that behave like bonds or that are affected by rising interest rates. “

The S&P 500, heavily concentrated in expensive tech names, looks more like a long-term bond, Subramanian said, as investors today pay a high price for expected growth in the future. This makes the market particularly sensitive to minor variations in interest rates.

Growth stocks have been favored over the past decade due to falling rates, making the value of future cash flows more attractive. If rates were to rise next year, however, growth stocks would be particularly vulnerable to volatility.

The Biden administration’s infrastructure bill is expected to result in increased capital spending by U.S. businesses, and beneficiaries of that trend are expected to outperform next year, according to Subramanian. On the other hand, the beneficiaries of the recovery in consumer spending are expected to lag behind, as high oil prices push down spending by low-income Americans.

Subramanian likes the energy, health care and financials sectors, and suggests investors should underweight consumer stocks (core and discretionary) as well as communications services stocks. From a factor perspective, it favors value and quality stocks (companies with strong balance sheets and healthy cash flow), as well as small caps.

Historically, small caps tend to benefit more from heavy capital spending and outperform in an inflationary environment, according to Jill Carey Hall, head of US small and mid-cap strategy at Bank of America. The group is also less exposed to the foreign market, faced with growing geopolitical risks, and more linked to domestic growth.

Measured by the forward price-to-earnings ratio, small-cap stocks in the

Russell 2000 Index

are currently 23% cheaper than their large-cap counterparts in the

Russel 1000,

Hall said, as the group has historically traded at a premium of around 2%. The Covid-19 pandemic may have hit small businesses harder, but they are also rebounding stronger – and the market has not fully integrated these gains.

Write to Evie Liu at [email protected]

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