Next Year’s US Stock Market Won’t See This Year’s Gains... Impact of Interest Rate Hikes

[Asia Economy Reporter Seulgina Jo] Can the US S&P 500 index, which has surged by a whopping 26% so far this year, continue this growth next year? Wall Street investors have bet that the same upward trend as this year will be difficult. There is a view that interest rate hikes by the US central bank, the Federal Reserve (Fed), will hamper the stock market's upward momentum next year.

According to the Wall Street Journal (WSJ) on the 26th (local time), the S&P 500 index rose 16% last year and has surged 26% so far this year. However, an analysis of data from 13 financial institutions that published stock market forecasts for next year estimated that the S&P 500 index is expected to reach around 4940 by the end of next year, which is only about 4.5% higher than the closing price on the 23rd.

WSJ reported, "The S&P 500 will bid farewell to large-scale stock price gains next year," adding, "Changes in monetary policy, such as interest rate hikes, will limit the upward trend."

The Fed announced at the December Federal Open Market Committee (FOMC) regular meeting that it would advance the end date of asset purchase tapering, originally scheduled for June next year, to March. This effectively signals an earlier interest rate hike. This is considered an obstacle to future stock price gains.

Typically, investors increase investments in risky assets such as stocks when interest rates are low, but when inflation accelerates and the benchmark interest rate rises, they seek other investment options rather than the stock market. Since the ultra-low interest rate monetary policy at the beginning of last year drove the US stock market's rise, there is a high possibility that tightening policies to be implemented in the future will lower stock market valuations or limit the upward trend.

According to financial information provider FactSet, the 12-month forward price-to-earnings ratio (PER) of the S&P 500 was about 21 times last week. The average over the past five years was about 19 times.

The S&P 500 index has recorded an average annual increase of 8.4% since its introduction in 1957 until last year, and in the recent three years, it soared by 29%, 16%, and 26%, respectively. Joseph Amato of Neuberger Berman said, "This is not a normal situation. It has been a period of remarkable returns," and added, "I do not expect to see such performance in 2022."

However, WSJ added that such forecasts could also be wrong. A representative example is that many investors predicted a sharp stock price decline throughout 2020 after the spread of COVID-19.

Besides the S&P 500, the Dow Jones Industrial Average and the Nasdaq index in the New York stock market have risen by 17.5% and 21.5%, respectively, compared to the beginning of the year.