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.