By Steve Goldstein
It was quite the Manic Monday, with not just the S&P 500 suffering its worst single-day performance in nearly two weeks, but retail favorites such as meme stocks GameStop and AMC Entertainment getting battered.
Thomas Lee of Fundstrat made three points. No investor wants to go risk-on into the Federal Open Market Committee meeting, equities reached an all-time high just last week, and the U.K. pushing COVID-19 vaccines is a reminder the U.S. still has to get through the omicron variant wave.
The 2022 outlooks are still pouring in, and a relatively optimistic outlook comes from the equities and derivatives strategy team at BNP Paribas, whose 5,100 call for the S&P 500 /zigman2/quotes/210599714/realtime SPX -0.16% next year matches Goldman Sachs, though it isn’t the highest on Wall Street. The team says valuations are “rationally exuberant.” The S&P 500 forward earnings yield premium to the U.S. 10-year Treasury /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y -2.40% is in line with the five-year average, even if the Shiller price-to-earnings ratio is at a 99th percentile reading. And valuations, it notes, “have almost never been the sole cause of a market correction.”
BNP also details the exuberance elsewhere, such as in options. Call option volumes exploded at different times in 2021, and recently exchange-traded fund flows and market moves have been positively correlated, which it says is “consistent with a more momentum-driven regime, in which investors are chasing rallies rather than buying dips.”
From meme stocks to mega caps, there have been several instances of large dislocations and abnormal price moves. It expects more of these dislocations next year, but still of the “episodic and idiosyncratic” variety. While margin debt is at an all-time high, household balance sheets are also in excellent shape , and the labor market remains strong. “It could take either a significant economic or market downturn to change this behavior, neither of which we anticipate in 2022,” BNP says.
As for institutional investors, there’s a high bar to decrease allocations to equities while real returns for many assets are low or negative, the so-called there-is-no-alternative, or TINA, trade.
What about a Fed tightening cycle? Historically, the team says, it’s the end of the tightening cycle, not the start, that has been problematic for stocks. That isn’t to say there won’t be speed bumps, but BNP says there could be a rally afterward.
It is more worried about another topic du jour, supply chains, though it assumes disruptions will start to ease next year. Backlogs as measured by Institute of Supply Management polls of purchasing managers have already started to peak, and a gradual shift back into services demand from goods would also ease inflationary bottlenecks. But if these disruptions don’t ease, or get worse, there’s the risk of the Fed hiking into a weaker growth outlook, which could unwind the elevated valuations.
But the team is optimistic about corporate earnings. Historically, U.S. sales growth has been correlated to global nominal gross domestic product growth (that is, real growth plus inflation). BNP’s estimate of 4.8% real GDP growth, and 4.1% consumer-price index growth, translates into earnings per share growth of 12.4%, 5 percentage points above the consensus.
The Fed’s two-day meeting starts Tuesday, with the announcement and press conference coming on Wednesday. Producer prices for November came in hotter than forecast with an 0.8% increase.
California imposed a month-long mask mandate for indoor public places, as Philadelphia will require vaccine proof for bars, restaurants and indoor sporting events. Two doses of the vaccine made by Pfizer /zigman2/quotes/202877789/composite PFE +1.75% and BioNTech /zigman2/quotes/214419716/composite BNTX +0.60% offer 70% protection against hospitalization from the omicron variant, though just 33% protection against infection, according to a South African study. Pfizer separately said its oral antiviral offers 89% protection against hospitalization or death.
Rentokil Initial /zigman2/quotes/207510108/delayed UK:RTO +0.48% struck a $7 billion deal to buy Terminix Global Holdings , boosting its U.S. presence in pest control.
U.S.-listed Chinese social media provider Weibo /zigman2/quotes/206830028/composite WB -4.29% was fined by China’s internet regulator for violating a cybersecurity law.
Tesla /zigman2/quotes/203558040/lastsale TSLA -3.73% CEO Elon Musk continued his sale of shares while exercising options, taking the total stock sales to about $12 billion. The cryptocurrency Dogecoin /zigman2/quotes/226077044/realtime DOGEUSD -4.19% jumped in value after Musk tweeted Tesla will start allowing merchandise purchases with it.
An initial examination by the U.K. Competition and Markets Authority found a “vice-like” grip by Apple /zigman2/quotes/202934861/composite AAPL -1.43% and Alphabet /zigman2/quotes/202490156/lastsale GOOGL -1.95% unit Google over mobile device ecosystems, ahead of a final report in June.