Just above Warren Buffett’s Berkshire Hathaway
The 2022 environment promises to be less friendly
US government policies are now focusing on actions by large corporations that may be anti-competitive. In addition, greatness has the disadvantage of having to maintain the now broad base on which future growth is built. Then there is the natural tendency damper (in percentage terms) to be great.
Three needs arise from increased inflation: increased pricing (income), controlled costs (expenses) and a maintained customer base (demand). With salary increases lagging behind price increases, the pressure will be on potential clients to reduce their non-essential expenses as much as possible. This includes both new products and subscription services.
Then there are the upcoming interest rate hikes. They will eventually affect consumers and businesses. However, there will be a quick effect on bond prices and stock valuations. This last item is where the big guys could be hit. To see how current prices will be viewed as interest rates rise:
This brings us to the S&P 500, itself
These six stocks have a total market cap of $ 11T, up from $ 8T at the end of 2020. The current size is 26% of the S&P 500 total, up from 24% last year. Obviously, the increased weighting is due to better performance.
The return on the S&P 500 year-to-date is 28% (including dividend income). All six big stocks (market capitalization at the beginning of the year weighted) are up more than 38%. The weighted performance of the other 494 companies (74% of the S&P 500 market capitalization) is 24%.
In past markets, such concentrations of performance have finally given way to reversals. Often times, a trigger is when a new tax year arrives and pent-up sales activity is released.
If the Big Six underperform in 2022, they will obviously have a big effect on the S&P 500. In addition, since each is a stock listed on the Nasdaq, they will have an impact on the Nasdaq Index and the Nasdaq 100.
On the flip side, depending on what else is going on, the Dow Jones Industrial Average could shine by comparison. Only Apple and Microsoft are among the 30 stocks. Their effects, based on price weights, are Apple at 3.2% and Microsoft at 6.2%, for a total of 9.4%.
The bottom line: there is no stock market trend line leading from 2021 to 2022
It is likely that Covid will assume a lesser position in investor thinking and its effects on the economy as 2022 moves into spring and summer. This six-month outlook is at the heart of Wall Street’s positive analysis and forecast. The dispelling Covid and the return to normality could therefore be expected to support the stock market.
However, the concerns raised above could disrupt both “real” (inflation-adjusted) economic growth and market valuations.