Stock Markets 2022: Fog on the Horizon

No consensus on a trend for 2022 is emerging. Everyone is afraid to be too cautious as the S&P 500 approaches 5,000 points.

At the end of the year, I usually dive into the forecasts for the next year from economists and forecasters to try to determine the trends in the economy and the markets. So, in these last days of December, I did this exercise.

The first impression that emerges is one of total confusion. For the stock markets, 2022 is a foggy horizon. The situation was already complicated before the appearance of the Omicron variant, but now it is a total cacophony.

Usually, the situation is quite simple: a consensus emerges. There is no guarantee that this consensus will be right, since it is usually wrong, but at least the experts manage to agree on a trend for the coming year.

At the beginning of 2020, the consensus was for a fairly calm year. Then came the COVID-19 pandemic. Everyone thought it would mean a dark year for the stock market. Especially since we had a liquidity crisis in March 2020 that made all markets plunge.

However, after a 29% increase in 2019, the S&P 500 was still up 16% in 2020.

At the beginning of 2021, the consensus was for a moderate increase for the year. Lo and behold, the S&P 500 was up +29% to an ATH:

29% in 2019. 16% in 2020. 29% in 2021. Exceptional performances while the average increase of the S&P 500 since the creation of the index in 1957 is “only” 8.7%. The S&P 500 is therefore trading at 21 times earnings estimates for the next 12 months compared to an average of 19 times over the last 5 years.

The fact that the consensus has been wrong for the last two years in a particular context makes everyone cautious for 2022.

Of the 15 or so major banks that have published their forecasts for 2022, the average forecast for the S&P 500 is for a 4.5% increase. Behind this average, there are significant differences between Morgan Stanley, which forecasts a decline of 6.9%, and more optimistic forecasts from BNP Paribas, which forecasts a rise of 12%.

From -6.9% to +12%, that is quite a difference.

For those in favor of a rise in 2022, easy money is still flowing and corporate earnings will still rise by 9.2% in 2022. For those in favor of a decline in 2022, the main argument is the upcoming rise in interest rates which should weigh on valuations.

The most surprising thing here is that if the coming rise in interest rates is a concern, as is the Omicron variant, the real fear that prevails is completely different. All market participants are afraid of being overly cautious and seeing the market still exceed the most optimistic forecasts.

To put it simply, it is the most complete fog on the horizon for 2022 in the stock market. Before we can define a precise strategy for the year, we will probably have to wait for January to give us more factual information.

To be continued ...

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