Noting that this year’s theme is a “tug of war between earnings tailwinds and valuation headwinds,” Bob Doll observes that 2022 is shaping up to be a more challenging year for investors.
As he has for more than 30 years, Doll, the Chief Investment Officer at faith-based investment firm Crossmark Global Investments, offers his annual top 10 predictions on the trends and issues he believes are positioned to shape the economy and markets for the coming year.
“The world improves, but do markets already know?” was the theme for Doll’s 2021 annual predictions, reflecting a somewhat divided outlook between the global economy and his previous firm’s market outlook. Doll recently offered an assessment of his 2021 predictions, in which he noted that he made 6 out of 10 predictions accurately, slightly below his long-term average of 7-7.5 out of 10.
So what does he foresee for this 2022? “While solid economic and earnings growth will be a tailwind for equities, rising interest rates and stubborn inflation will be headwinds. This is likely to create volatility and, at times, turbulent churning,” writes Doll, who notes that this is why he proposed the theme of “Tug of War Between Earnings Tailwinds and Valuation Headwinds” for the year.
Despite a positive earnings picture, Doll believes that the overall macro backdrop will become less favorable for the equity market in 2022. Moreover, the Fed’s recent tapering announcement marks the beginning of a shift toward a less accommodative monetary policy stance along with reduced fiscal stimulus, he notes.
What’s more, Doll observes that the combination of elevated market valuations, revenue and earnings growth losing steam, and rising bond yields point to more frequent pullbacks and higher volatility. As such, valuation will be of “paramount importance” in positioning equity portfolios, he says, adding that his firm believes that it makes sense to “lean modestly in favor of cyclicals.”
Against that backdrop, here are Doll’s 10 predictions for 2022:
- U.S. real growth and inflation remain above-trend but decline from 2021 levels.
- Inflation falls, but core inflation remains stuck at around 3%.
- For the first time since 1958/1959, 10-year Treasuries provide a second consecutive year of negative returns.
- Stocks experience their first 10% correction since the pandemic and fail to make the gains that are widely expected.
- Cyclical, value and small stocks outperform defensive, growth and large stocks.
- Financial and energy outperform utilities and communication services.
- International stocks outperform the U.S. for only the second year in the last decade.
- Values-based investing continues to gain share.
- After a 60-plus-year low in 2021, federal interest expense as a percentage of revenue begins a long-term move higher.
- Republicans gain at least 20-25 House seats and barely win the Senate.
