- The S&P 500's year-to-date gain of 27% will continue in 2022 amid rising corporate profits, according to Goldman Sachs.
- The bank expects the S&P 500 the hit 5,100 next year and deliver a 10% return when including dividends.
- "Profit growth has accounted for the entire S&P 500 return in 2021 and will continue to drive gains in 2022," Goldman said.
There's still more upside ahead for the stock market in 2022 even after more than 60 record closing highs and a near 30% gain in 2021, Goldman Sachs strategist David Kostin said in a Tuesday note.
The S&P 500 will deliver a 10% return for investors next year when including dividends, according to Kostin, as he expects the index to hit a high of 5,100 thanks to a continued rise in corporate earnings.
But the gains will likely feel muted for investors who have been conditioned for annualized returns of 16% in the S&P 500 over the past decade. That's because the Fed will begin to raise interest rates next year for the first time since 2018, essentially taming the upside potential for stock prices, according to Kostin.
"Real interest rates will also rise, solidifying the ceiling on valuation multiples and driving rotations within the equity market," he said.
Despite Kostin's expectation for Fed rate hikes next year, real interest rates will remain historically low and continued profit-margin increases will outweigh any headwinds from higher rates in terms of delivering equity returns, according to the note.
Kostin expects much of the upside in stocks next year to be driven by demand from US households and corporations, evidenced by a $14 trillion cash pile held by US households and a record $1 trillion in stock buyback authorizations from corporations.
"We expect households will shift some of this capital into equities over time," the note said.
To take advantage of the expected gains in stocks next year, Kostin recommends investors avoid high labor cost firms, own virus-sensitive cyclical stocks, and favor profitable growth stocks over unprofitable growth stocks.