Our secular bull market thesis for U.S. stocks remains alive and well: 2022 will be a year of the less positive, yet positive nonetheless.
Think of it as a much-deserved respite of sorts. Undoubtedly the fear, rhetoric and negativity will continue to garner most of the headlines and dialogue from clients. However, we choose to stick with realities of low interest rates, positive earnings and still very doubtful investor sentiment that will continue to propel U.S. stocks higher.
We believe U.S. stocks will likely enter a more traditional return structure to the tune of high-single-digit gains in the next few years as moderation, normalization and consistency become predominant and realistic. Yes, this transition is likely to be difficult, and will probably display a range of calendar year returns from single-digit percentage losses to double-digit gains. It is for these reasons that we continue to favour high quality, GARP (growth at a reasonable price) and dividend growth strategies across all sectors, styles and sizes. The more fundamentally disciplined and focused that investors are as it relates to stocks, themes, stories, products and services in 2022, the better served they will likely be, in our view.
As a result, we are forecasting a 2022 year-end price target of 5,300 and an earnings per share EPS target of US$245 for the S&P 500. These estimates imply a price-to-earnings ratio of 21.6 (a drop of 1.3 from our 2021 estimates) and a roughly 10.4-per-cent price gain with another 16.7 per cent of earnings growth for the S&P 500.
We continue to believe U.S. stocks are in the early stages of transitioning toward an earnings-driven, more fundamentally defined performance trajectory, especially relative to the heavily laden, momentum trading strategies that have defined much of the performance in the past few years. This “transition,” however, traditionally brings with it less positive performance and more volatile trends. As such, we believe a transition to more active portfolio management will become an increasingly important tactic for portfolio managers in the quarters and years ahead.
The Canadian picture
We expect Canadian stocks to track U.S. performance once again, but at a slightly more moderate pace, posting a return just shy of 10 per cent in 2022, based on our 2021 price target of 22,000 for the S&P/TSX Composite Index. However, a double-digit return is still very possible, in our view. Canada has long represented a strong inflationary hedge and could benefit in the near term from inflationary pressures given its outsized exposure to both the energy and materials sectors. However, we expect these impulses to ebb in 2022 along with the supply chain issues, which could turn into a glut in the second half of the year, thereby mitigating this advantage.
Ultimately, like the United States, we believe the returns in Canada will continue to be positive as the market comes to terms with the transition back to a more normalized environment. Yes, as America goes, so goes Canada.
Our work suggests there are several Canada-specific advantages heading into 2022. We believe there remain significant value opportunities in Canada, especially relative to the United States. Energy remains a deep value sector, while the materials sector is now in discount territory given its heavy weight in gold, which has seen a sharp compression in valuations.
In addition, while 2021 saw a stabilization of distributions at these more depressed levels, the TSX also exhibited an epic positive surprise cycle that has translated into one of the sharpest earnings rebounds on record. This, according to our work, is likely to generate an impressive, if not ambitious, dividend growth cycle that could see overall dividend growth surge well above historical averages over the next 12 to 24 months.
Over all, Canadian and global markets saw one of the sharpest recoveries on record in 2021, with the TSX hitting new all-time highs and earnings consistently beating expectations for six consecutive quarters. Although this sharp recovery is unlikely to be matched in 2022, we believe Canadian equities can still approach double-digit growth in 2022. Our expectation is based on the assumptions of a more normalized cost-of-equity (dividend discount model) and a market multiple (price-to-earnings model) that is in line with the historical average.
We are forecasting a 2022 year-end price target of 24,000 and an EPS target of $1,500 for the S&P/TSX.
Our 2022 outlook assumes a return to normalcy and a transition to a more earnings-driven environment, which is likely to see greater bouts of volatility and the increasing importance of stock selection.
Brian Belski is chief investment strategist at BMO Capital Markets.
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