Enormous fiscal stimulus, funded by monetary policy, and pandemic induced supply-side challenges pushed inflation to its highest level in nearly 40 years. This poses risk to cycle longevity and valuations, but good years are likely still ahead of inflation slows in 2022. Here are our 22 investment themes and views to watch for in 2022:

1. Continued growth in 2022: Growth is strong in this new expansion, but with uncertain inflation and interest rates ahead, which can ripple through currency, commodity and risk asset markets. Inflation should slow in 2022 as stimulus fades, more services return and goods production climbs. This cycle is two years old, perhaps going on seven; productivity and disinflation needed to rejuvenate.

2. A rapidly aging cycle? Given this uncertainty, we embrace diversification across style, regions and size and seek to enhance investment performance by positioning with thematic secular trends, such as: digitalization, ESG (environmental, social and governance), workforce productivity and health-care solutions for an aging U.S.

3. This cycle can be golden, if inflation slows: Based on DWS forecasts, U.S. real GDP/CPI (consumer price index) will approach the 1.6 golden ratio that marks past periods of prosperity and strong equity returns.

4. How high will the Fed go? Since 1982, the average hiking cycle was 240bp over 15 months, last cycle ended in 2019 was 225bp. We expect the Fed Funds rate to plateau at 1.5-2.0%. If greater, it likely boosts the dollar, hits commodity prices, cheapens imports, pressures global growth and boosts Bank profits. The Fed’s actions are likely incremental to avoid disruptions.

5. Interest rates should rise, but stay negative in real terms: We expect 10-year Treasury yields to rise to 2.0% in 2022 with long-term inflation expectations at about 2.5%. Thus, 10-year Treasury Inflation-Protected Securities (TIPS) yields stay negative at -0.5%, but up from -1.0% today. We watch 3-year yields for indication of a rate hike plateau, also 5-year yields and breakeven. We still prefer TIPS over Treasury bonds.

6. Treasury yield curve flatter: We estimate the neutral real Fed Funds rate to be 0%, or 2% nominally given the Fed’s 2% inflation target. If the Fed hikes higher, an inverted curve is likely.

7. Low interest rates due to high wealth, but debt and valuations suggest hikes will slow GDP/CPI.

8. Biggest inflation risk is excessive fiscal spending: Reducing the risk of stubbornly high inflation requires right-sized fiscal policy that is well targeted with clear return on spending goals.

9. Mid-term elections: Democrats face inflation-stained record. Republicans likely retake Senate.

10. A more virtual world: Constrained physical economy induces digital solutions and alternatives.

11. New economy infrastructure: 5G, semi fabs, bio labs, green energy, next-generation defense.

12. Car wars: The ‘20s will be the decade of electric cars; excitement now, fierce competition later.

13. Energy comeback: Oil prices recover in 2021, but higher prices from here risk faster transition.

14. The 2020s remembered? Decade started with Covid and ends with many medical advances?

15. S&P 500 is a growth index: About 45% of S&P 500 market cap is Tech/Digital and 2/3rd growth industries. Tech is a super sector at 30% of S&P market cap, communications at 10%, Internet retailing 4%, and other digital businesses scattered in financials, REITS and elsewhere.

16. S&P Titans: Top five, 10, and 50 stocks by market cap are now 26%, 34%, and 58% of index. The S&P 500 is dominated by digital and intangible assets. We remain constructive on these assets, but seek diversification. We think extremely demanding valuations will be tested for justification.

17. Russell 2000/S&P 600: No corporate tax rate hike supports greater small cap allocation. Banks and industrials are big sectors in small caps and attractive. Banks benefit from rising interest rates and smaller industrial firms should benefit from supply-side responses to high goods prices.

18. Foreign equities: Foreign developed markets (DM) are value titled. European and Japanese manufacturing firms could outperform the S&P in 2022. We remain attracted to the long-term growth potential of Asia ex. Japan, which includes premier digital enterprises, discounted for gov’t commands and controls.

19. S&P sector strategy: Banks offer strong inflation protection, if the Fed fights it with rate hikes. Health care has innovation at undemanding valuations. It’s not the 1970s, the economy is less sensitive to commodities and most energy/materials face heightened production and regulatory costs. Companies hiking prices on costs aren’t boosting profits and yet disappointing customers and encouraging them to search for alternatives. And profit-raising price hikes invite competition.

20. 2022E S&P EPS $228: Up 7%, assuming no corporate tax rate hikes. We prefer companies raising productivity instead of price, those with high sales growth and huge economies of scale. Careful with companies with free cash flow (FCF) above earnings, as many are managing a long-term decline.

21. Dangerous PE? 20+ supported by low real yields, growth tilted S&P 500 composition and low investment fees. The S&P EPS yield and dividend yield are real yields, don’t subtract inflation.

22. Bumps toward S&P 5000: Only five years without a 5%+ dip from one-year high: 1964, 1993, 1995, 2017 and 2021. Two consecutive years would surprise. Our views are constructive and optimistic given the demonstrated resilience and innovation of the economy. Yet, more volatility with just moderate gains is likely, small losses possible, but neither are large gains or losses likely.

David Bianco is chief investment officer for the Americas at DWS Group.