The US stock market, measured by the S&P 500 index, may struggle to rise next year due to similarities to the technology bubble of 2000, according to BofA Global Research.
The S&P 500 SPX will end at 4,600 at the end of 2022, according to BofA Global Research in an equity and quant strategy note dated November 23. That is down about 1% from the index's close of 4,655. U.S. stocks rebounded partially from Friday's selloff that had been sparked by fears over the omicron variant of the coronavirus.
That's a pretty flat market from here, said Savita Subramanian, head of equity and quant strategy at BofA, during an online media briefing on the firm's U.S. economic and stock market outlook for 2022. She said that Wall Street strategists increased their stock allocations by almost 20 percentage points and there was a lot of similarities between today and 2000 -- the tech bubble peak. Subramanian said the bubble today is in bonds, not stocks, with investors expecting negative real interest rates despite that being previously unthinkable. Subramanian said you want to avoid stocks that behave like bonds or are hurt by rising interest rates. She said we like small caps RUT over large caps, as well as value over growth. RBC says that the S&P 500 has become a long-term bond, with investors paying for a lot of back-end-loaded growth. She explained that the past decade has favoured big growth stocks with lots of growth going out in the future as discount rates have fallen. The BofA report shows the strategists are expecting a higher discount rate as the Federal Reserve may hike rates next year. The price of the S&P 500, which measures the performance of U.S. large-cap stocks in the U.S., has gone up about 24% this year, according to FactSet data. In 2022, we're looking for 13% dividend growth, with the action taking place in total return rather than price return for the S&P 500, said Subramanian. Get ready for a total return world.