The Wall Street Journal (WSJ) reported on the 2nd (local time) that the U.S. stock market will rise in 2022 on the back of corporate earnings growth, but it will be difficult to soar as much as last year due to uncertainties in the new coronavirus infection (COVID-19) crisis and a hike in the benchmark interest rate.
According to this, the U.S. stock market’s Standard & Poor’s 500 index rose 27% last year, but it is still considered attractive in terms of valuation.
Major investment banks (IBs) such as Goldman Sachs, Wells Fargo, and Credit Suisse expect the S&P 500 index to rise by about 6-11% this year.
This is because the 12-month leading share price-earnings ratio (PER) of the S&P 500 index is 21 times, still lower than 22.8 times at the end of 2020. Considering that corporate earnings are expected to continue to improve this year, there is room for the stock market to rise further.
According to financial information provider Factset, S&P 500 companies’ profits are expected to increase by 9.2% this year.
This is a significant slowdown in growth compared to last year’s 45% growth rate, but it is comparable in 2017 when the S&P 500 index rose 19% annually, the journal explained.
By industry, prospects may vary depending on the valuation.
For example, the PER of the information technology (IT) industry is 28 times, the highest level in the past decade. The PER of the voluntary consumer goods industry is 33 times, which is still high even if it is lower than the record high of 2020.
These industries could show limitations in yields if interest rates rise and slowing performance growth are combined, analysts said.
On the other hand, PER in the energy industry was 11 times and finance 15 times, which was considered a relatively preferred industry as well as low valuation and corporate earnings growth.
The journal, however, pointed out that the unpredictable COVID-19 incident and the impending Federal Reserve’s key rate hike are easing investors’ optimism.
In particular, the impact of the spread of COVID-19 is two-sided. A slowdown in economic growth due to a decrease in consumption spending could ease inflation, the biggest concern in the market in recent year.
Stock Market in 2022: better but not much
However, some predict that high inflation could continue due to supply chain confusion and labor shortages due to the spread of COVID-19.
These concerns were reflected in the U.S. government bond market, with long-term U.S. government bond rates sideways at less than 2%, while short-term interest rates rose, the journal said.
In other words, investors are worried about the future situation of the U.S. economy but are confident that the Fed will raise interest rates three times this year, which is revealed in the U.S. government bond long-term and short-term interest rates movement.
In the year when the Fed began to raise interest rates, the stock market usually did well, but rising interest rates on government bonds put a burden on the stock market in many ways. Companies’ borrowing costs may increase, and investors may find investment alternatives other than the stock market.
The journal predicted that if interest rates on U.S. government bonds rise to a significant level, meme stocks such as small and medium-sized IT stocks, GameStop, and AMC (stocks that attract individual investors online) will be particularly hit.
