Bank of America ‘sees’ a ‘negative’ new year for the stock market

With the signs of excessive speculation and high valuations prevailing in the stock market, the current environment looks like a bubble at the end of its cycle and has many “similarities” with the dotcom crisis in 2000, Bank of America points out, predicting that 2022 will be a “negative” year for equities.

“There are too many similarities between today and 1999/2000 to ignore,” said Savita Subramanian, head of Bank of America’s head of US equities and quantitative strategy, in a recent note.

Current market conditions are very similar to those that prevailed just before the internet technology stock bubble burst in the late 1990s, when stocks entered a bear market in 2001, analysts at the investment bank point out.

In fact, Bank of America claims that some signs in the market today are undoubtedly worse than in 2001, adding that the signs of speculation are evident in the midst of an “increasing acceptance of the unthinkable” that prevails among investors.

With a number of increasingly worrying signs in the stock market today – including negative real interest rates, rising inflation, sluggish IPOs and liquidity risks – the Wall Street investment bank is now predicting a for equity values.

Bank of America sets a target price of 4,600 points for the S&P 500 index next year, which indicates a decline of 2% compared to the price that closed on Monday, at 4,682.84 points.

Meanwhile, analysts at other major investment banks are “divided” over how the S&P 500 will move next year: Morgan Stanley sets a target price for the index even lower than Bank of America, while other banks, such as JPMorgan, Goldman Sachs and Wells Fargo, estimate that shares will move slightly higher in 2022.

“We started our career in the late 1990s, which was very similar (s.s. the conditions) – interest rate hikes by the Fed, high valuations, many IPOs, negative risk premiums for stocks – and which was also characterized by acceptance of the outsider, “said Subramanian and other Bank of America strategic analysts.

Factors that need attention

Bank of America points out that many of the challenges facing markets today may be worse than they were during the tech bubble in the late 1990s.

The Federal Reserve is expected to raise interest rates for the first time since the pandemic began – with markets already betting it will raise at least several interest rate hikes in 2002, according to the CME FedWatch Tool. These increases will take place in a statistically accurate market, where valuations are already very high, according to Bank of America.

In addition, the market is focused on growth – more than in the 1990s, the investment bank notes, adding that more companies with negative final financial results are listed today than during the dotcom bubble.

It is recalled that the Federal Reserve has not raised interest rates since the onset of the coronavirus pandemic. Meanwhile, boosted by unprecedented easing fiscal and monetary policy, the stock market has recovered quickly from the sell-off caused by the March 2020 coronavirus outbreak.

The S&P 500 has gained more than 26% since the beginning of this year, but markets could experience greater volatility in 2022 amid growing fears of inflation, the evolution of the coronavirus delta, problems of supply chains and the reversal of monetary policy by the Federal Reserve, concludes the investment bank.