Happy New Year everyone! After sharing my 2022 housing market forecast, it’s only right to share my 2022 stock market forecast. Creating forecasts helps me think things through given I’ve got real money at stake.

Thanks to continued gains in the stock market, roughly 35% of my net worth is in equities. This is 5% higher than my upper-limit target of 30%.

70% of my equity investments are in index funds. The remaining 30% of my equity investments are in single stock names such as Apple, Tesla, Google, Meta, Amazon, and Netflix. I’ve held these growth stocks for years; as a result, their percentage has grown from about 10%, 10 years ago.

The most recent high conviction post I had on the overall market was on March 18, 2020, when I published, How To Predict A Stock Market Bottom Like Nostradamus. I ended up dumping about $300,000 in the S&P 500 and various stocks in March and April 2020. Unfortunately, I did not hold onto my entire position on the way up.

Overall, my stocks generate between $1,600 – $1,800 in dividend income a month. The dividend income could be higher, but I predominantly invest in growth stocks over dividend/value stocks. When I’m in my 60s, I will probably allocate more towards dividend stocks for more income and less volatility.

In 2021, my public investment portfolios grew 23.75%, underperforming the S&P 500 by about 2.9%, but outperforming the DJIA and NASDAQ. In 2020, my public investment portfolios grew 40%, outperforming the S&P 500 by about 23%.

Finally, I worked in equities for 13 years and have been investing in stocks since 1995. Now that I’ve shared some background, here’s my 2022 stock market forecast.

2022 Stock Market Forecast: Uninspiring Upside

Let’s first discuss some positives and negatives for the stock market in 2022.

Positives for the stock market in 2022:

  1. Interest rates will likely remain low, despite the Fed saying it will hike three times in 2022.
  2. Inflation should subside and still create a negative real interest rate environment.
  3. Corporate earnings are likely to continue growing by ~10% after rebounding by ~35%+ in 2021.
  4. Consumers will likely spend more aggressively due to a bull market in stocks, real estate, and alternatives.
  5. More government spending to boost the economy.
  6. A less potent COVID variant that is boosting immunity.
  7. New vaccines and pills to combat COVID variants.
  8. Expanding corporate margins as prices go up and input costs decline.
  9. Easing supply chain woes.

Negatives for the stock market in 2022:

  1. Historically high valuations.
  2. Rising Fed Funds rates make credit card debt, student loan debt, and auto debt more expensive.
  3. Three consecutive years of returns much higher than the historical average.
  4. Decelerating economic and corporate profit growth.
  5. COVID is still here with more unknown variants to come.
  6. Rising real yields as inflation slows and rates inch higher, even though they will likely remain negative.
  7. Deteriorating foreign relations with Russia and China

Overall, I expect the S&P 500 to rise by a modest 5% to 5,008 after a stellar 27% increase in 2021. A 5% return will be roughly 3.3X the current 10-year bond yield and 3% – 5% below my median home price increase for 2022.

S&P 500 Valuations

Let’s say the S&P 500 earnings grow by 10% to $228 in 2022. This would mean at 5,000, its P/E would be about 22X versus a mean of about 16X and a median of about 15X.

The WSJ has the S&P 500 currently trading around 28.5X, while Multpl in the chart below has the S&P 500 closer to 30X. We won’t have the full S&P 500 earnings number until companies report their 4Q2021 numbers in 1Q2021.

Either way, the S&P 500 will still be trading on the higher end of its historical range. The higher the valuations, the harder it may be for equities to perform. It’s one of the reasons why Vanguard, GS, BoA, and a bunch of other financial firms have lowered their 10-year outlook for stocks and bonds.

S&P 500 forward P/E 2022

Shiller P/E Valuation

The Shiller P/E chart looks much more expensive. The Shiller P/E uses inflation-adjusted 10-year earnings data to minimize the impact of short-term changes. The all-time high in the Shiller P/E ratio was December 1999, when the figure reached 44.19. This high coincided with the dot-com driven rally in tech stocks of the late 1990s.

Today, we are close to an all-time high Shiller P/E, but it should decline in 2022 if earnings grow faster than the S&P 500 rises. I was working on the trading floor of GS at 1 New York Plaza from 1999 – 2001 and it feels more bubbliscious today than back then.

The mean Shiller P/E is about 17X and the median Shiller P/E is about 16X. Therefore, current valuations are expensive, even if the Shiller P/E declined to about 36X in 2022.

Shiller P/E 2021 and 2022 estimate

The combination of high valuations, a tightening Fed, three years of way above-average returns, and decelerating earnings growth are the main reasons why I’m not excited about the stock market in 2022.

I believe you can make better risk-adjusted returns in venture debt and real estate. As a result, these two areas are where I’m investing most of my money. I’m also investing in a new venture capital fund because I want to invest in earlier-stage companies with high growth rather than publicly traded companies already at expensive valuations.

2022 Stock Market Forecast Confidence Levels

When making stock market forecasts, there are no guarantees. Therefore, let me share with you my confidence levels at various price increases for the S&P 500.

Negative appreciation: 35% confidence

Positive appreciation: 66% confidence (lowest confidence level I’ve had in years)

5%+ appreciation: 60% confidence (base case)

8%+ appreciation: 50% confidence 

10%+ appreciation: 40% confidence

I feel there’s a decent chance the S&P 500 goes nowhere or down in 2022. After three strong years, we could easily see a -6.24% year as we saw in 2018.

In comparison, I have 90% confidence the real estate market will return another positive year in 2022. As a result, much of my new capital will be invested in private real estate funds, venture debt, and venture capital. I’m focused on minimizing volatility while earning steady returns.

Historical S&P 500 Returns

Take a look at the chart below. There is a pattern where after 2-5 years of strong gains, the S&P 500 takes a breather. We’ve brought forward our gains in 2021 and I think we’d be fortunate to gain some more in 2022.

Historical returns of the S&P 500 index and 2022 stock market forecast

How I Plan To Invest In Stocks In 2022

I don’t think we’ll see a 20%+ decline in the S&P 500 in 2022 if the index does correct. That would be officially a bear market. However, I feel with 60% confidence there will be a 10% correction at some point and 90% confidence there will be at least a 5% correction at some point.

Therefore, it’s smart to raise cash to take advantage of any corrections. Although my forecast for the S&P 500 to hit 5,008 in 2022 is uninspiring, a 5% return is still a positive nominal return. I also don’t have strong enough conviction to think a greater than 10% correction is coming. Therefore, I plan to hold onto 90%+ of my positions.

Since 2012, I’ve limited my equity exposure as a percentage of net worth to 25% – 30%. The reason is due to my desire for less volatility and my preference for real estate. However, I’ve let the equity exposure increase to 35% given how strong the gains have been. Therefore, I will likely get more defensive in my tax-advantaged portfolios so I don’t incur any tax liabilities.

35% may not sound like a big percentage to you. But to me, the absolute dollar figure has grown large due to the bull market and aggressive savings. My public equity exposure alone is worth well over 2X my entire net worth when I left work in 2012.

I think Financials and Health Care will likely do well. As for my favorite industry, tech, I expect the gorillas to still outperform. There’s been some real carnage with some individual tech stocks in 2021 that I find very interesting. Namely, Docusign, Alibaba, Baidu, and Twitter.

Inflation will come down and interest rates will stay low. Therefore, the discount rate for valuing tech companies will also come down, making tech companies more valuable in analyst models.

Confidence In The Stock Market From Insiders

One investing X factor to consider is what one of the best American investors who is privy to insider information is doing with her money. That person, of course, is Nancy Pelosi, Speaker of the House.

Nancy, along with her financier husband, Paul, have successfully grown their family’s net worth to well over $200 million over the almost three decades she’s been in congress. With a $223,500 income, Speaker Pelosi and Paul have created a top 0.1% net worth.

Based on the latest Congressional trading disclosures in late-December 2021, Pelosi bought at least $2 million worth of call options in names such as Alphabet, Micron, Roblox, Salesforce, and Walt Disney. I like her purchases in Salesforce and Disney after their respective sell-offs. As a long-time shareholder of Alphabet, I approve of her latest purchase.

If Pelosi is buying millions of dollars in call options right before 2022, that gives me a little more confidence the stock market will end higher in 2022. You don’t have to be a smart investor to make money. You simply need to follow what smart investors are doing with their money. Or you can invest in their fund, if they have one.

Nancy Pelosi latest insider trades

Other Wall Street S&P 500 Targets For 2022

For good measure, here are some Wall Street S&P 500 targets for 2022. I actually didn’t look at them before I came up with my own 2022 stock market forecast. Therefore, I’m just as fascinated by their target prices as you may be.

Credit Suisse: 5,200

Goldman Sachs: 5,100

JP Morgan: 5,050

RBC: 5,050

Financial Samurai: 5,008

Deutsche Bank: 5,000

Citigroup: 4,900

Barclays: 4,800

Bank of America: 4,600 (Dang!)

Morgan Stanley: 4,400 (Double dang!)

So there you have it, you now know a variety of stock market forecasts for 2022. The forecasts are as bifurcated as I’ve seen them in recent memory. It’ll certainly be interesting to see what 2022 brings!

If the S&P 500 hits 5,000 in early 2022, I’m taking some profits and reassess in another stock market forecast update. I’m determined to spend more of my investment gains in 2022 to live a better life.

Related posts:

A DIY Investing Guide

Stocks Or Real Estate: Which Is A Better Investment

Readers, what is your prediction for where the S&P 500 finishes in 2022? Are you bullish or bearish? How is your public investment portfolio and net worth positioned for 2022? Are you more positive on the S&P 500 or real estate? What are your favorite asset classes where you will be investing your money?

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