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BMO’s chief investment strategist Brian Belski is known for being unapologetically bullish. And even amid incessant market concerns about inflation, supply chain constraints, rising bond yields and peak economic growth, he’s not changing his tune as the new year dawns.

BMO strategists led by Mr. Belski released their 2022 market outlook Thursday, and while some cooling off from the blistering gains of this year is expected, they still forecast stock returns near double-digit territory, driven by what they see as an earnings-driven multi-year secular bull market.

“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,” Mr. Belski and his strategists wrote in their outlook.

He set a year-end 2022 S&P 500 price target of 5,300 - a gain of more than 12% from Thursday’s close - with earnings per share reaching US$245.

He anticipates his S&P 500 target for the end of this year of 4,800 will be easily reached, maybe even a bit surpassed, thanks to earnings continuing to beat expectations. His targets for 2022 imply a price to earnings ratio of 21.6 times, which is actually lower than what he predicts for the end of 2021, thanks to an expected 16.7% boost to earnings next year.

While monetary policy concerns continue to swirl, he notes the U.S. Federal Reserve is still pumping unprecedented liquidity into the system. The Fed’s balance sheet will still expand by more than US$400 billion until it’s done tapering its bond purchases next year, he notes.

Mr. Belski fully expects interest rates and bond yields to rise. But that shows the economy is improving - a good thing, after all.

What about inflation and supply constraints? Mr. Belski sees those problems subsiding soon.

“Traditional inflation measures are already showing preliminary signs of decelerating heading into 2022,” Mr. Belski says.

And while supply chain problems will persist for a while, the BMO strategist doesn’t see it lasting the full 12 to 18 months that many expect.

“In fact, we believe a supply glut could occur as early as the second half of 2022 – the exact opposite of what occurred in 2009 following the financial crisis when supply greatly outstripped demand. Furthermore, we believe a massive structural change in supply chains is well under way, one that will result in a steady flow of onshoring and increasingly efficient inventory and manufacturing operating functions.”

His bottom line: “An accommodative Fed, excessively low interest rates, potential peaking inflation and supply chain fears, and positive earnings growth REMAINS a very good recipe for equities – PERIOD.”

For Canada, he expects stock market performance to largely track the U.S., but at a slightly more moderate pace. He set a year-end 2022 S&P/TSX Composite index target of 24,000, with earnings per share rising to $1,500.

Based on his year-end 2021 price target of 22,000 - which he jacked up twice this past year but reaffirmed in his report on Thursday - that represents a return of just under 10%.

“However, a double-digit return is still very possible, in our view,” he says, noting that back-to-back double-digit returns are a very common occurrence.

The TSX posted three consecutive years of double-digit annual returns from 1995 to 1997, four consecutive double-digit returns from 2003 to 2006, and two double-digit price returns in 2009 and 2010, according to Mr. Belski. “Akin to the current market environment, these periods were all post-recession rallies that extended beyond expectations. Indeed, risk may be tilted to the upside.”

“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,” he said.

While bond markets are pricing in rate hikes in Canada earlier than in the U.S., Mr. Belski said his research shows Canadian stocks react much more to what happens with monetary policy down south.

“Overall, the US is likely to remain the main engine of global growth in 2022 and Canada is likely to climb the “Wall of Worry” alongside its neighbour to the south, particularly when it comes to monetary policy, rising interest rates, inflationary pressures, and slowing earnings growth. Yet, ultimately, like the United States, we believe the returns will continue to be positive as the market comes to terms with the transition back to a more normalized environment,” he said.

For sectors, BMO reiterated its earlier recommendations that investors in the Canadian market should be overweight in consumer discretionary stocks, industrials, financials, and materials.

The bank has turned less bearish on real estate stocks, upgrading its recommendation on that sector to market weight, citing a stronger-than-expected earnings environment. “Also, our work has shown real estate to be less interest sensitive then other high yielding sectors, particularly since 2002,” BMO added.

The one sector BMO says investors should underweight in portfolios is utilities: “Rising yields, low organic growth and high payout ratios are a tough combination,” it said.

Meanwhile, the bank continues to see only limited upside in the energy sector. “The price of crude oil has surpassed the $80 threshold for the first time since 2014. With that said, however, it is important to point out that consensus target price forecasts have not moved significantly higher despite the surge in prices YTD. In fact, current forecasts for WTI crude stand at $67 and $69 for year-end 2021 and 2022, respectively, which would imply a $12-14 drop from the $81 price of crude right now.

“Therefore, we expect this bout of momentum-driven outperformance from energy stocks to eventually subside, with the sector performing more in line with the broader market in the coming months – a development that we may have already started to see in recent weeks,” he said.

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