3 stock market predictions for 2022

Stocks performed well for investors in 2021, delivering double-digit gains. Here, Edward Sheldon shares what he thinks might happen in 2022.

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The stock market has had a good run in 2021. As I write this in late December, the FTSE 100 is up about 14% year to date, while the S&P 500 is up about 26%.

Will these indexes continue to climb in 2022? I’d love to tell you they will. However, realistically, I have no idea (and neither does anyone else), because the stock market is notoriously unpredictable.

Having said that, I do have a number of more general stock market predictions for 2022. Here’s a look at three and the implications for my investment strategy. I could be wrong, of course, as none of us know what’s ahead.

Valuation will be important

My first prediction for 2022 is that there’s likely to be a strong focus on valuation. It’s fair to say that valuation has been a bit of an afterthought at times since the beginning of Covid-19. With bond yields at rock-bottom levels and central banks pumping trillions of liquidity into the system, investors have piled into stocks without focusing too much on value.

For a while, this strategy worked with many high-growth stocks soaring spectacularly. However, over the last six months or so, valuation has come back into focus and a lot of those expensive high-growth stocks have been crushed.

I expect value to remain in focus in 2022 so I won’t be buying high-growth stocks with outrageous valuations for my portfolio next year.

Small EV stocks will underperform

My second prediction for 2022, and this is related to my first, is that some electric vehicle (EV) stocks will underperform.

EV stocks are very popular with retail investors and it’s not hard to see why. With consumers increasingly focusing on sustainability, there’s strong demand for EVs right now and companies that operate in the space are benefitting.

However, valuations across the sector remain way too high, in my view, particularly in the start-up space.

Take Lucid and Rivian, for example. These companies have only sold a handful of cars. Yet the former has a market-cap of around $60bn while the latter has a valuation of around $90bn. These figures look very high, to my mind.

It’s worth noting that Lucid currently has short interest of 19%, while Rivian’s is around 13%. This indicates that short sellers see downside risk to these stocks in 2022.

Given the high valuations across the EV sector, I won’t be buying any of these stocks for my portfolio in 2022.

Big Tech will hold up

My final prediction is that the Big Tech stocks such as Apple, Microsoft, Alphabet, and Amazon will continue to generate solid returns for their investors.

One reason I’m bullish here is that these companies continue to grow at a very healthy rate. Another is that they all have solid balance sheets and excellent cash flows. So they’re actually quite ‘defensive’ in nature.

Most importantly though, none of these stocks look particularly expensive right now. Currently, Apple has a P/E ratio of about 30. Meanwhile, Alphabet has a P/E ratio of about 26. That’s not so high, in my view, given their level of growth.

Of course, there’s no guarantee these stocks will do well in 2022. But I think the risk/reward proposition is quite attractive. So I’m going to continue to build my portfolio around these Big Tech stocks next year.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Edward Sheldon owns Alphabet (C shares), Amazon, Apple, and Microsoft. The Motley Fool UK has recommended Alphabet (A shares), Amazon, Apple, and Microsoft. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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