Macro commentary by eToro analyst for Romania, Bogdan Maioreanu
There are only a few days until we will say goodbye to 2021, a very good year for the markets and we will move into the full of uncertainties 2022. Looking back, we have seen the stock markets in the US and EU reaching new heights, but investors are asking what’s next? I will try to give you some perspectives concerning the 2022 US and European markets.
In the last 71 years, the S&P delivered more than 10% gains during the final two months of the year just five other times (1954, 1962, 1970, 1985, and 1998). And statistically each of those five times resulted in a following year with double digits returns in the market, with an average gain of 18%. It is possible to witness next year a very rare fourth consecutive year with two digit returns in the S&P 500. It would be only the second time in the last 50 years. S&P 500 might reach a target of 5,050. Aside from statistics, we have a unique environment of high inflation, low bond yields and low interest rates. However the investors need to be diversified. There are a lot of threats ranging from the pandemic, with the new Omicron variant, to the geo-political situation in Europe and Asia. The Global GDP is forecasted to grow next year to 4.4% which is almost double than the average of the past decade, supporting over 10% earnings growth, whilst still-low global interest rates should support equity valuations at well-above average levels.
In the US the S&P 500 valuation is 30% above the long term average making investors fearing overvaluation. But the index is well supported by record high corporate profitability and still very low interest rates. The valuations might be high but not for all companies. It looks like we are going to another year with strong GDP growth and market conditions that are favoring cyclicals, the companies that were affected by the pandemic and that are now reopening, the small caps, the financial industry and energy. The increases in interest rates forecasted for next year are casting a long shadow over the defensive stocks because these are sensitive to bond yields. Tech stocks might be interesting from a long term perspective. In the end facing the unknown, portfolio diversification is the key.
In 2022, Europe is in an especially interesting sweet spot. Lower valuations of the shares than the ones in the United States, with an ECB not very keen on curbing asset purchases or to increase interest rates. Also we have in Europe the long term budget and the “Next Generation” which is offering the necessary funding to recover from the pandemic, providing more than 800 Billion EURO until 2027. In addition to that, being in the forefront of the fight against global warming, there are a lot of funds for clean energy. All these premises are putting Europe in an interesting spotlight for investors.
Inflation was one of the main concerns for investors in 2021. It might remain a concern in 2022 though next year we might see lower inflation rates as supply chains adjust and economic growth eases from the boom levels seen this year.
Bogdan Maioreanu, eToro analyst and markets commentator, has over 20 years of experience in financial services and investments and a strong background in journalism. He held different Corporate Banking management positions in both Raiffeisen Bank and OTP Bank, before moving to business consultancy roles working for IBM Romania among others. Bogdan is an Executive MBA from Asebuss and Washington University.
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