With signs of excessive speculation and high valuations in the stock market, the current environment resembles a late-cycle bubble that is very much “similar” to the dotcom boom in 2000, Bank of America says, predicting a negative year ahead for stocks in 2022.
“There are too many similarities between today and 1999/2000 to ignore,” said analysts led by Savita Subramanian, head of U.S. equity and quantitative strategy at Bank of America, in a recent note.
The current market set-up is very similar to the one just before the internet tech bubble burst in the late 1990s, when stocks fell into a bear market starting in 2001, the analysts said.
Some of the signs in today’s market are arguably worse than in 2001, Bank of America argued, adding that signs of speculation are evident amid a “growing acceptance of the unthinkable” among investors.
With a slew of increasingly worrying signs in today’s markets—including negative real interest rates, surging inflation, frenzied IPO activity and liquidity risks, the Wall Street firm now predicts a negative year for stocks ahead.
Bank of America set a price target of 4,600 for the S&P 500 next year, which is a 2% decline from Monday’s closing price of 4,682.84.
Analysts at other major banks are mixed on how the S&P 500 will fare next year: Morgan Stanley has a price target for the index that is even lower than Bank of America’s, while others such as JPMorgan, Goldman Sachs and Wells Fargo all expect stocks to rise slightly in 2022.
“We began our career in the late 1990s, which felt similar – Fed hike, valuations, IPOs, negative equity risk premia – and was also characterized by an acceptance of the outrageous,” Subramanian and other Bank of America strategists said.
What To Watch For:
Several challenges facing markets may be worse than the tech bubble in the late 1990s, according to Bank of America. The Federal Reserve is expected to raise interest rates for the first time since before the pandemic—with markets already betting on at least several rate hikes in 2022, according to the CME FedWatch Tool. Those rate hikes will happen in a statistically expensive market, where valuations are already running very high, Bank of America pointed out. What’s more, the market is fixated on growth—more so than in the 1990s, the bank said, adding that more companies with negative earnings have gone public than during the dotcom bubble.
The Federal Reserve hasn’t raised interest rates since before the pandemic. Boosted by unprecedented fiscal and monetary policy, the stock market has rebounded rapidly from its coronavirus-driven sell-off in March 2020. The S&P 500 is up over 26% so far this year, but markets could be more volatile in 2022 amid rising fears about inflation, the Covid-19 Delta variant, supply chain issues and a reversal in the Federal Reserve’s monetary policy.