After sharing my 2022 housing market forecast, it’s only right to share my 2022 stock market forecast. Creating forecasts helps me think things through given I’ve got real money at stake.
First some background.
Due to continued gains in the stock market, roughly 35% of my net worth is in equities. This is 5% higher than my upper-limit target of 30% as I’ve let positions ride. 50% of my net worth is in real estate after buying a new home in 2020.
70% of my equity investments are in index funds. The remaining 30% of my equity investments are in single stock names such as Apple, Tesla, Google, Meta, Amazon, and Netflix. I’ve held these growth stocks for years; as a result, their percentage has grown from about 10%, 10 years ago.
The most recent high conviction post I published was on March 18, 2020, How To Predict A Stock Market Bottom Like Nostradamus. I ended up dumping about $300,000 in the S&P 500 and various stocks in March and April 2020. Unfortunately, I did not hold onto my entire position all the way up. But I have held onto 95% of my existing positions.
Overall, my stocks generate between $1,600 – $1,800 in dividend income a month. The dividend income could be 7-8X higher, but I predominantly invest in growth stocks over dividend/value stocks. When I’m in my 60s with likely lower income, I will allocate more towards dividend stocks.
In 2021, my public investment portfolios (includes bonds) grew 24.5%, underperforming the S&P 500 by about 2.5%. In 2020, my public investment portfolios grew 40%, outperforming the S&P 500 by about 23%.
Finally, I worked in equities for 13 years and have been investing in stocks since 1995. Now that I’ve shared some details, here is my 2022 stock market forecast.
2022 Stock Market Forecast: Uninspiring Upside
Let’s first discuss some positives and negatives for the stock market in 2022.
Positives for the stock market in 2022:
- Interest rates will likely remain low, despite the Fed implying it may hike three times in 2022.
- Inflation should subside and still create a negative real interest rate environment.
- Corporate earnings are likely to continue growing by ~10% after rebounding by 50%+ in 2021.
- Consumers will likely spend more aggressively due to a bull market in stocks, real estate, and alternatives.
- More government spending to boost the economy.
- A less potent COVID variant that is quickly transmitting and creating immunity.
- New vaccines and pills to combat COVID variants.
- Expanding corporate margins as prices go up and input costs decline.
- Easing supply chain woes.
Negatives for the stock market in 2022:
- Historically high valuations.
- Rising Fed Funds rates make credit card debt, student loan debt, and auto debt more expensive.
- Three consecutive years of returns much higher than the historical average.
- Decelerating economic and corporate profit growth.
- COVID is still here with more unknown variants to come.
- Rising real yields as inflation slows and rates inch higher, even though they will likely remain negative.
- Deteriorating foreign relations with Russia and China
- Markets have historically fallen before midterm elections with a democratic President, House, and Senate.
Overall, I expect the S&P 500 to rise by a modest 5% to 5,008 after a stellar 27% increase in 2021. A 5% return will be roughly 3.3X the current 10-year bond yield and 3% – 5% below my median home price increase forecast for 2022. With the stock market selling off in January, 5,008 is now looking tougher to achieve. But I’m going to stick with it so far.
S&P 500 Valuations
Let’s say the S&P 500 earnings grow by 10% to $228 in 2022. This would mean at 5,008, the index P/E would be about 22X versus a mean of about 16X and a median of about 15X.
The WSJ has the S&P 500 currently trading around 28.5X, while Multpl in the chart below has the S&P 500 closer to 30X. We won’t have the full S&P 500 earnings number until companies report their 4Q2021 numbers in 1Q2021.
Whatever the true valuation, the S&P 500 will still be trading on the higher end of its historical range. The higher the valuations, the harder it may be for equities to perform. It’s one of the reasons why Vanguard, GS, BoA, and a bunch of other financial firms have lowered their 10-year outlook for stocks and bonds.
Shiller P/E Valuation
The Shiller P/E chart looks much more expensive. The Shiller P/E uses inflation-adjusted 10-year earnings data to minimize the impact of short-term changes. The all-time high in the Shiller P/E ratio was December 1999, when the figure reached 44.19. This high coincided with the dot-com driven rally in tech stocks of the late 1990s.
Today, we are close to an all-time high Shiller P/E, but it should decline in 2022 if earnings grow faster than the S&P 500 rises. I was working on the trading floor of GS at 1 New York Plaza from 1999 – 2001 and it feels more bubbliscious today than back then. The key is to hold onto your massive gains.
The mean Shiller P/E is about 17X and the median Shiller P/E is about 16X. Therefore, current valuations are expensive, even if the Shiller P/E declined to about 36X in 2022.
The combination of high valuations, a tightening Fed, three years of way above-average returns, and decelerating earnings growth are the main reasons why I’m not excited about the stock market in 2022.
I believe you can make better risk-adjusted returns in venture debt and real estate. Even I Bonds, with a guaranteed 7.12% interest rate, seems more attractive.
2022 Stock Market Forecast Confidence Levels
When making stock market forecasts, there are no guarantees. Therefore, let me share with you my confidence levels at various price increases for the S&P 500.
Negative appreciation: 35% confidence
Positive appreciation: 65% confidence (lowest confidence level I’ve had in years)
5%+ appreciation: 60% confidence (base case)
8%+ appreciation: 50% confidence
10%+ appreciation: 40% confidence
I feel there’s a decent chance the S&P 500 goes nowhere or down in 2022. After three strong years, we could easily see a -6.24% year as we saw in 2018. This is very different to the bullishness I felt at the beginning of 2021.
In comparison, I have 90% confidence the real estate market will return another positive year in 2022. As a result, much of my new capital will be invested in private real estate funds, venture debt, and venture capital. I’m focused on minimizing volatility while earning steady returns.
Historical S&P 500 Returns
Take a look at the chart I put together below. There is a pattern where after 2-5 years of strong gains, the S&P 500 takes a breather. We’ve brought forward our gains in 2020 and 2021 and I think we’d be fortunate to gain some more in 2022.
How I Plan To Invest In Stocks In 2022
I don’t think we’ll see a 20%+ decline in the S&P 500 in 2022 if the index does correct. That’s like believing in a bear market this year. However, I feel with 65% confidence there will be a 10% correction at some point and 90% confidence there will be at least a 5% correction at some point.
Therefore, it’s smart to raise cash to take advantage of any corrections. Although my forecast for the S&P 500 to hit 5,008 in 2022 is uninspiring, a 5% return is still a positive nominal return. I also don’t have strong enough conviction to think a greater than 10% correction is coming. Therefore, I plan to hold onto 90%+ of my positions.
Since 2012, I’ve limited my equity exposure as a percentage of net worth to 25% – 30%. The reason is due to my desire for less volatility and my preference for real estate. However, I’ve let the equity exposure increase to 35% given how strong the gains have been. Therefore, I will likely get more defensive in my tax-advantaged portfolios so I don’t incur any tax liabilities.
35% may not sound like a big percentage to you. But to me, it is due to the bull market and aggressive savings. My public equity exposure alone is worth over 2X my entire net worth when I left work in 2012.
I think Financials and Health Care will do well. Regarding my favorite industry, tech, I expect the gorillas like Apple to still outperform. There’s been some real carnage with some individual tech stocks in 2021 that I find very interesting. Namely, Docusign, Alibaba, Baidu, Teladoc Health, and Twitter.
Confidence From Insiders
One interesting investing X factor to consider is what one of the best American investors who is privy to insider information is doing with her money. That person, of course, is Nancy Pelosi, Speaker of the House.
Nancy, along with her financier husband, Paul, have successfully grown their family’s net worth to well over $200 million over the almost three decades she’s been in Congress. With a relatively modest $223,500 income, Speaker Pelosi and Paul have created a top 0.1% net worth.
Based on the latest Congressional trading disclosures in December 2021, Pelosi bought at least $2 million worth of call options in names such as Alphabet, Micron, Roblox, Salesforce, and Walt Disney. I like her purchases in Salesforce and Disney after their respective sell-offs. As a shareholder of Alphabet, I also approve of her purchase.
If Pelosi bought millions of dollars in call options right before 2022, that gives me a little more confidence the stock market will end higher in 1Q2022 at least. You don’t have to be a smart investor to make money. You simply need to follow what smart investors are doing with their money. Or you can invest in their fund, if they have one, e.g. Berkshire Hathaway.
S&P 500 Performance A Year After 25%+ Gains
Here’s another positive historical indicator for the S&P 500 in 2022. The average return for the S&P 500 is 14% after it returns more than 25% the previous year. Only three years out of 17 years (17.6%) did the S&P 500 return negative.
If we return another 14% in 2022 to 5,433 on the S&P 500, inflation will likely stay above 6.8% as investor purchasing power skyrockets. Further, I suspect more people will quit their jobs because why bother when investment gains are doing the heavy-lifting for us.
It now feels like my forecast of only a 5% return in 2022 sounds conservative. But I’m sticking with it and I hope I’m wrong on the upside.
Other Wall Street S&P 500 Targets For 2022
For good measure, here are some Wall Street S&P 500 targets for 2022. I actually didn’t look at them before I came up with my own 2022 stock market forecast. Therefore, I’m just as fascinated by their target prices as you may be.
Credit Suisse: 5,200
Goldman Sachs: 5,100
JP Morgan: 5,050
Financial Samurai: 5,008
Deutsche Bank: 5,000
Citigroup: 4,900 (raised to 5,100 on Jan 5, 2022)
Bank of America: 4,600 (Dang!)
Morgan Stanley: 4,400 (Double dang!)
So there you have it, you now know a variety of stock market forecasts for 2022. The forecasts are as bifurcated as I’ve seen them in recent memory. It’ll certainly be interesting to see what 2022 brings!
If the S&P 500 hits 5,000 in early 2022, I’m taking some profits and reassess in another stock market forecast update. I’m determined to spend more of my investment gains in 2022 to live a better life.
Readers, what is your prediction for where the S&P 500 finishes in 2022? Are you bullish or bearish? How is your public investment portfolio and net worth positioned for 2022? Are you more positive on the S&P 500 or real estate? What are your favorite asset classes where you will be investing your money?
Join 50,000+ others and subscribe to my free weekly newsletter. Since 2009, the newsletter has helped people achieve financial freedom sooner, rather than later.