Why Wall analysts estimate that 2022 will not be another year of big profits for S&P

US stocks are heading to mark another year of very high profits in 2021. But many investors do not expect a similar development in 2022.

The S&P 500 index has risen 26% so far in 2021, after rising 16% in 2020. But profit growth is expected to moderate next year and the US Federal Reserve (Fed) announced that “sees” three interest rate hikes in 2022.

According to the Wall Street Journal, when interest rates are low, investors tend to focus on risk assets such as stocks to generate revenue. When inflation rises and officials raise interest rates, the value of companies’ future profits decreases and investors have more alternatives to make money.

Low interest rates in early 2020 helped boost stock valuations, which remained high in the months that followed. Many analysts and investors now believe that raising interest rates is likely to prevent further rises in valuations and may cause a decline.

The S&P 500 traded about 21 times its projected earnings for the next 12 months last week, above the five-year average of just under 19 times, according to FactSet.

Some strategic analysts believe that the change in monetary policy could help limit stock gains to levels that are more in line with their long-term trend, according to the Wall Street Journal.

The S&P 500 has an average annual profit of 8.4% from 1957, the year of its introduction, until last year and comes from three very strong years. The index jumped 29% in 2019, even higher than in 2020 and so far in 2021.

“This is not normal,” said Joseph Amato, president and chief investment officer at Neuberger Berman. “This was a great period of performance and what we expect is that we are not going to see that kind of performance in the market in 2022.”

Analysts can not predict global events or even how the market will react to them. Many analysts believed that stocks would fall sharply throughout 2020 after the Covid-19 pandemic hit the US, while a year ago, analysts underestimated the strength of the market rally in 2021.

However, many of the structures that have supported the market will weaken next year. Profits in 2020 and 2021 have been based on government spending and Fed interventions including near-zero interest rates.

Wall Street strategists forecast lower profits for the S&P 500 in 2022. Among 13 banks and financial services companies whose analysts have published forecasts for 2022, the average target for the end of the S&P 500 next year is 4940 points , about 4.5% above the point where the index closed on Thursday.

At the high end of forecasts for next year, strategic analysts at BMO Capital Markets predict that the S&P 500 will close in 2022 at 5300, 12% above its current level. The BMO team expects that increasing corporate profits will help push stocks up.

Morgan Stanley strategic analysts, meanwhile, said their key scenario is that the S&P 500 will close the year at 4,400 points, down 6.9%.

According to the Wall Street Journal, falling valuations would be particularly significant for a stock index such as the S&P 500, as it is made up of large tech stocks that often trade high with multipliers. Microsoft, Nvidia, Apple, Alphabet and Tesla recently accounted for about a third of benchmark profits this year. Tesla traded about 123 times its projected earnings for the next 12 months last week, while Nvidia traded about 58 times.

The profits of the big American companies are expected to increase next year, although at a slower pace than this year’s rise. Analysts estimate that the profits of the S&P 500 companies will increase by 9.2% in 2022, according to FactSet, compared to the projected increase in profits by 45% in 2021.

However, many investors have said that profits are a reason to be confident that the market rally can last.