The investing landscape will likely be much different in 2022 than 2021, but the backdrop is still fertile for more gains on the S&P 500, according to Goldman Sachs.
Goldman said Tuesday it expects the S&P 500 (^GSPC) to rise 9% to 5,100 by the end of 2022. If achieved, that would mark a 10% total return including dividends. Through Tuesday, the S&P 500 had advanced about 25% so far in 2021.
"The equity bull market will continue," said David Kostin, Goldman Sachs chief U.S. equity strategist.
Kostin lists several reasons for his optimism.
Corporate tax rates will probably remain unchanged next year and remain a tailwind to profits, contends Kostin. S&P 500 earnings will grow by 8% in 2022 to $226 a share based on Kostin's modeling. Kostin sees sales for S&P 500 companies increased by 9% year-over-year.
Investors will therefore be keen on further increasing their allocations to stocks.
"Households own half of the $28 trillion in U.S. cash assets, an increase of $3 trillion since before the pandemic. We expect households will shift some of this capital into equities over time," adds Kostin.
While those are supporting factors for stocks, Kostin cautions next year will not be without its risks that keeps returns lower than the red-hot ones seen in 2021.
"Decelerating economic growth, a tightening Fed, and rising real yields suggest investors should expect modestly below-average returns next year," Kostin warns.
According to Goldman's data, the S&P 500 has historically generated an average 12-month return of 8% in environments of positive but slowing economic activity and rising interest rates.