Why the 2022 Market Might Be Low-Growth

Economist Hugh Johnson and Goldman’s David Kostin sketch out a muted year in the mid-single digits.

We just got a taste of a market rout. Now, with several days of positive returns, you have to wonder: What is next? Well, right now, one compelling view is that the conditions aren’t great for a big year.

In that spirit, it’s worth listening to two market experts, who see just a so-so, mid-single-digit gain for stocks by year-end: Hugh Johnson, chief economist at Graypoint, and David Kostin, chief US equity strategist for Goldman Sachs. While they didn’t speak at the same event, their outlooks are the most fresh and informed by the recent market unpleasantness.

Higher interest rates. The end to Federal Reserve bond buying. Rising inflation. Earnings slowdowns. The ongoing pandemic. Federal stimulus money running out. To each man, such an environment seems unlikely to prepare the path for another blowout year. So long to the sparkling performances, led by growth (i.e., tech) stocks, that have been in abundance. The S&P 500 vaulted 28.9% in 2019, 16.3% in 2020, and 26.9% in 2021.

Stocks won’t bedazzle investors the way they have, by Johnson’s and Kostin’s reasoning. Indeed, the Wall Street consensus is for the index to increase about 10%, far lower than the past three years and yet higher than Johnson and Kostin project.

Look for a “low-return environment,” Johnson said in a CNBC appearance. He sees 2022 possibly returning 4%, which he refers to as “upside potential.” Earnings, while expected to be solid, are seeing a deceleration, but they could surprise the market, he said.

To underscore the turn away from go-go investing, Johnson noted the rotation to value stocks lately, with consumer staples such as Procter & Gamble doing well. Over the past 12 months, P&G has logged a 27% advance. Value stocks “are at the top of the performance ladder,” he said. “Value has significantly outperformed growth.”

Kostin expects the S&P 500 will log around a 6% increase this year. Speaking at a regular Goldman Sachs forum, he said recently tumbling stock prices and higher bond yields mask “the changing dynamics beneath the surface.”

He said companies with fast-growing revenues but little or no profit—that would be many young tech firms—have seen their stock prices “severely punished.” But their peers with solid profits have had just minor declines.

Tech companies with fast-increasing revenues but slender-to-negative profit margins have seen their valuations “severely punished,” while their peers with strong revenues and strong margins have experienced smaller declines, he said.

“The idea of a higher interest rate environment reduces the value of that future expected growth,” Kostin said. “And that’s really important for these companies where their margins are very thin.”

Another factor that militates against robust index escalations, in Goldman’s eyes, is that investors now are reluctant to buy on the dips.

As Jonathan Shugar, who manages equity sales on the cross-asset sales team in the firm’s global markets division, put it during the same program, “There’s no sense of urgency to act—which is interesting because if you went back to the start of the pandemic, where we had a massive selloff and then a recovery, a lot of people felt that they hadn’t taken advantage of those opportunities quickly enough.”

Just for the record, there are some on Wall Street who believe that the market will end the year in the red. Most prominent among these bears is Bank of America, which expects a 3.4% 2022 slide in the S&P 500.

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