S&P 500 could end ‘fairly flat’ in 2022 amid previously ‘unthinkable’ negative real rates, says BofA strategist

The US stock market, as measured by the S&P 500 Index, may struggle to rise next year due to similarities to the 2000 tech bubble, according to BofA Global Research.

The S&P 500 SPX,
will end 2022 at 4,600, BofA Global Research predicted in an equities and quantifications strategy note dated November 23. This represents a decline of about 1% from the index’s close at 4,655.27 on Monday, as U.S. stocks partially rebounded after Friday’s sell-off that was sparked by fears about the omicron variant of the coronavirus.

It’s a “fairly flat market from here,” Savita Subramanian, head of equities and quantitative strategy at BofA, said on Monday during an online press briefing on the company’s economic and stock market outlook in the States. United for 2022. “Sadly, we see a lot of similarities. Between now and 2000 – the peak of the tech bubble,” she said, pointing to “high expectations” as Wall Street strategists upping their expectations. stock allocations of nearly 20 percentage points and “lots of IPO activity”.

But “the bubble today” is about bonds, not stocks, Subramanian said, with investors expecting negative real interest rates when previously “unthinkable”. By 2000, investors had accepted that the risk premium of equities was negative, she said, calling it a “premonitory sign” at a time when the market was overvalued with areas of “bubble-shaped foam. “.

“You want to avoid stocks that behave like bonds or that are affected by rising interest rates,” Subramanian said. “We like RUT small caps,
on large caps, ”she said, as well as“ value on growth ”.

Read: Omicron variant could delay ‘breakout’ performance of these stock trades, according to RBC

In Subramanian’s view, the S&P 500 has become “a long-term bond” with investors paying for “a lot of loaded growth in the background.” The last decade has favored “large growth stocks with a lot of growth potential going forward as discount rates have fallen,” she explained. But the BofA report shows that strategists now expect a higher discount rate as the Federal Reserve could start raising rates next year.

The price of the S&P 500, which measures the performance of large-cap U.S. stocks in the United States, rose about 24% this year through Monday, according to FactSet data.

In 2022, “we are looking for 13% dividend growth with the ‘stock’ playing in total return rather than price return for the S&P 500, Subramanian said.” Prepare for a total return world. . “

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