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Don’t look to Wall Street strategists for a year-end swig of good cheer. If they have one core message for 2022, it’s that it is time to put away the punch bowl and sober up.

Consider the forecasts from 16 top investing teams, compiled by Aneet Chachra of Janus Henderson Group PLC. Half the prognosticators have year-end 2022 targets for the benchmark S&P 500 index of big U.S. stocks that are either below where the index (which closed Friday at another record high) currently sits or only a hair higher.

The downbeat outlook is a dramatic shift from last year, when everyone was betting on a big lift from a reopening economy. Now many of the investing cognoscenti are warning we can expect more of the moody back-and-forth behaviour we have seen in recent weeks.

Their cautious tone is unusual for people who have every occupational incentive to stress the positive. It suggests we have reached the inevitable point in every market cycle when many investors find themselves taking big risks in exchange for paltry rewards. Picking up nickels in front of a steamroller is not a game that usually ends well.

Yet that is precisely what many U.S. investors appear to be doing. Stocks in the world’s largest financial market are now trading at 40 times their average real earnings per share over the past decade. That is more than twice the historical norm. According to a presentation this week by asset manager Vanguard, “U.S. equities have not been this overvalued since the dot-com bubble.”

Just as in the late 1990s, a few stocks dominate the U.S. market. The 10 biggest companies – think tech superstars such as Alphabet Inc., Inc., Apple Inc., Meta Platforms Inc., Microsoft Corp., Nvidia Corp. and Tesla Inc., as well as old-economy stalwarts such as Berkshire Hathaway Inc., JPMorgan Chase & Co. and United Health Group Inc. – account for more than 30 per cent of the S&P 500′s value.

Their dominance is growing. Seven out of 10 have outpaced the index this year, while Berkshire and Meta (the oh-so-trendy new name for what used to be called Facebook) have fallen just short of the benchmark’s 27-per-cent gain since January. Only Amazon has lagged far behind the index and that is largely payback for the retailer’s mammoth gains the year before.

If there is a key difference between the 1990s and now, it lies in what the market loves most. During the dot-com era, everyone wanted warp-speed growth. These days, it’s market power. All 10 of Wall Street’s most adored companies are profitable companies with what appear to be impregnable positions in their chosen niches.

The appeal of these great businesses is obvious, especially right now when bonds are paying less than zero in after-inflation terms. Trapped in a low-return world, where bonds function as certificates of wealth destruction, many investors appear to have decided to take their chances with the stocks of the biggest, strongest companies they can find.

This is not an obviously silly move. However, it is a fragile proposition if sentiment turns. There are early signs that this is happening: In the third quarter of this year, direct net purchases of stocks by U.S. households and non-profits “slowed dramatically from the prior two quarters,” according to John Higgins, chief market economist at Capital Economics.

No wonder then that many of Wall Street’s big brains are dialling back expectations. Not only may investors be growing uncomfortable with their exposure to stocks, but interest rates seem nearly certain to rise over the next year, given that inflation is ripping higher at the fastest pace in a generation. As central banks raise rates to put a lid on inflationary pressure, corporate profits will suffer and rising yields will make bonds more attractive in comparison to stocks.

What no one has a good handle on is exactly how fast rates can rise and how hard they will bite. That hinges on inflation and whether Omicron and other viral mutations throw us back into lockdown hell. For now, the real economy is in solid shape. Households in both Canada and the United States have seen their savings soar during the pandemic. Job markets are drum-tight and purchasing managers’ indexes show businesses are expanding at a healthy clip.

So where to turn for a decent return? Canadians may want to stick close to home. Say what you will about the limitations of our banks-and-energy stock market, but it is nowhere near as bubbly as its cousin south of the border. In fact, the S&P/TSX Composite is trading at a forward price-to-earnings ratio that is nearly exactly in line with its historical average, according to a CIBC Capital Markets report this week.

Vanguard makes a similar point. It says stocks in developed markets outside of the U.S. are fairly valued – unlike stocks in the U.S. and emerging markets, which it classifies as “stretched” in price. It joins many others, including Bank of America and Morgan Stanley, in seeing the appeal of value stocks and small-cap stocks – the opposites, in other words, of the richly priced giants that now dominate the U.S. landscape.

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