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December 18, 2021 at 02:11 PM
What You Need to Know
- Strategists favor developed market stocks over emerging markets in 2022.
- Earnings will drive gains, but dividends and buybacks will also be factors.
- Emerging market stocks are expected to be under pressure from China's policies.
Despite expectations for rising rates in response to rising inflation, the outlook for the global stock market in 2022 is positive.
One early indication of this: U.S. stocks rallied Wednesday after the Federal Reserve announced it was speeding up the wind-down of its asset purchases, now expected to end in March 2022 instead of June, and Fed policymakers indicated a preference for three rate hikes next year, up from one or two hikes that strategists expected previously.
U.S. stocks are generally expected to lead other developed markets in 2022 despite their richer outperformance this year and resulting richer valuations. Forecasts for strong economic growth and healthy earnings are expected to underpin U.S. stock performance next year.
Earnings are seen as “the primary driver of returns as the U.S. equity market continues to grow into its above-average valuation,” according to J.P. Morgan Asset Management. But dividends and buybacks, which some companies suspended in 2021, will also provide support, according to Alan Berro, an equity portfolio manager at Capital Group.
“Dividends have come back in fashion,” said Berro in a recent outlook webinar. “Many companies have surplus capital that will be redeployed as regular and catch-up dividends and endorse share repurchase.”
Despite the favorable outlook, U.S. stock market gains in 2022 are not expected to come close to this year’s gains, which are already around 25%. They are expected to remain in the higher single digits.
