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Strategists have begun to deliver their outlooks for the stock market next year – and many are tempering expectations after this year's double-digit gains. 

Against a backdrop of vaccinations, easing lockdown measures and a broad-based economic reopening, the S&P 500 (^GSPC) rose by 21.6% in 2021 through market close on Nov. 30. The blue-chip index has also more than doubled from its March 23, 2020 nadir.

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The S&P 500 is unlikely to repeat these kinds of returns next year, based on the projections of a number of pundits. With market participants pricing in at least one interest rate hike from the Federal Reserve, and an initial boost from the reopening, and monetary and fiscal stimulus fading, the easy gains for this cycle are likely in the past. And at least one strategist thinks stocks are set to decline at least modestly next year from current levels.

Here's what some strategists from top Wall Street firms are predicting for the stock market next year. 

DWS Group (Target: 5,000): 'When it comes to PE multiples, they stand on the shoulders of the bond market'

DWS Group expects the S&P 500 will rise further into next year, supported by a combination of sustained — if slowing, earnings and economic growth — and a contained rise in rates. 

"Our view for risk assets is simply, it should be another good year in 2022," David Bianco, DWS Group chief investment officer, Americas, said during a media call on Dec. 1. "With lower inflation, slowing inflation, we should be comfortable with the idea that interest rates, both nominal and real, only climb modestly."

The firm expects to see the S&P 500 end 2022 at 5,000, growing 9.5% from closing levels on Nov. 30. 

"So far, long-term interest rates have only climbed slightly, and long-term real interest rates which are key for the PE [price-earnings ratio] of U.S. equities and equities worldwide, they're still near all-time lows," he added. "When it comes to PE multiples, they stand on the shoulders of the bond market."

Bianco expects the S&P 500's PE multiple, which has been trading at about 22 times current earnings, will be sustained through next year. The firm also anticipates S&P 500 companies' aggregate earnings per share (EPS) will come in at about $228 for 2022, growing by 7% from an estimated $213 level this year. This earnings view assumes no corporate tax hikes in the U.S. in 2022. 

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"Our view is that the equity market, the S&P, is largely fairly valued, but our preferences for a long time have remained the digital businesses — technology, communications, growth stocks in general, a preference for intangible businesses — we've argued that these types of businesses actually do provide terrific inflation protection," Bianco said. "This is not the 1970s, and often, we think the best way to protect against inflation is simply to own the best quality businesses. And look for businesses that are raising productivity, rather than raising price." 

Bianco also said the firm was Overweight the health care and financials sectors, with the latter constituting a beneficiary of higher rates given the likelihood of at least one Federal Reserve interest rate hike next year. 

Price target as of December 2021

Bank of America (Target: 4,600): Look for 'inflation-protected yield'

The S&P 500 is poised to end 2022 about flat compared to present levels, according to Bank of America's Savita Subramanian. 

The firm's 2022 outlook sees the index ending next year at 4,600, or up by just 0.7%, compared to closing prices on Nov. 30. That would come alongside slowing earnings growth, with S&P 500 earnings per share set to rise just 6.5% next year, based on Subramanian's projections.

Expectations for a higher discount rate serve as one of the main drivers for this outlook, with next year's predicted higher-rate environment weighing on stock valuations. Plus, as rates rise, other assets will compete for investor attention next year, Subramanian added. 

"What happens to the TINA ('There is no alternative' to stocks) argument if cash yields rival the S&P 500's 1.3% dividend yield, and the 10-year yield hits 2% by YE [year-end] 2022? Dividend growth needs to keep up, thus, our theme: inflation-protected yield," Subramanian said. "Inflation-protected yield favors Energy, Financials and Real Estate." 

"What will we say when we look back at today? Probably similar comments to 2000 hindsight: lofty expectations, Wall St. stock allocations up ~20 [percentage points], retail/democratized markets, frenzied IPO activity; first Fed hike into an overvalued market. And acceptance of the unthinkable: a negative cost of equity in '00, negative real rates today." she said. "But the last sign of a bubble — excessive corporate/ consumer leverage — has been transferred to the government." 

In terms of asset classes to favor, Subramanian said prioritize commodities, then cash, then stocks and then bonds in 2022. She also said she prefers small caps versus large caps and value stocks versus growth. 

Price target as of November 2021

Goldman Sachs (Target: 5,100): 'The equity bull market will continue'

Corporate profits are set to be the driving force for a further rise in the stock market next year, according to David Kostin, Goldman Sachs' chief U.S. equity strategist. The firm expects the S&P 500 to climb to 5,100 by the end of 2022, marking an about 11.7% rise from Nov. 30's closing prices. 

A trader looks up at a chart on his computer screen while working on the floor of the New York Stock Exchange. REUTERS/Lucas Jackson (UNITED STATES – Tags: BUSINESS TPX IMAGES OF THE DAY)

"Profit growth has accounted for the entire S&P 500 return in 2021 and will continue to drive gains in 2022," wrote Kostin in a note. "S&P 500 EPS will grow by 8% to $226 in 2022 and by 4% to $236 in 2023."

Companies will likely continue to expand profit margins even as input cost pressures and supply chain challenges linger, Kostin predicted, adding that he expects aggregate S&P 500 company profit margins to expand by another 40 basis points to reach 12.6% next year. Still, he suggested avoiding investing in firms with high labor costs, and favoring growth stocks with high margins over low-margin or unprofitable growth stocks. 

While the economic recovery and commensurate strength in corporate profits will likely extend into next year, one key factor will shift in next year's investing environment and apply pressure to valuations, Kostin said. 

"The Fed will begin to hike rates in July," Kostin said. "Real interest rates will rise, solidifying the ceiling on valuation multiples and driving rotations within the equity market."

"However, other aspects of the current equity market will persist. Real rates, while rising, will remain negative, and investor equity allocations will continue to establish record highs," he added. "In contrast with our expectation during the past year, corporate tax rates will likely remain unchanged in 2022 and rise in 2023. Corporate earnings will grow and lift share prices. The equity bull market will continue." 

Price target as of November 2021

Morgan Stanley (Target: 4,400): 'Our key message centers around multiple contraction'

Morgan Stanley thinks stocks are going down next year.

Mike Wilson, Morgan Stanley chief U.S. equity strategist, sees the S&P 500 dipping to 4,400 next year, representing a drop of 3.7%, compared to Nov. 30's closing prices. The biggest driver of the dip will be multiple compression, with a higher-rate environment next year pressuring stock valuations as earnings growth continues at a slower rate.  

"As we think about our forecasts for the year ahead, our key message centers around multiple contraction amid a continued mid-cycle de-rating, higher bond yields, and greater economic and earnings uncertainty," Wilson said in a note. "While earnings for the overall index remain durable, there will be greater dispersion of winners and losers and growth rates will slow materially." 

"While our overall earnings forecast for 2023 is about in-line with consensus ($245; 8% growth), we believe there is scope for significant dispersion — suggesting stock selection will provide plenty of opportunity in 2022 even if the index doesn't do much point to point," he added. "Bottom line, 2022 will be more about stocks than sectors or styles, in our view."

As interest rates set to move higher next year, bank stocks may benefit and outperform relative to long-duration growth stocks that would see valuations most pressured by rising rates, Wilson noted. However, "reasonably priced growth and defensive quality should hold up" as well, he added. 

"We think the obsession with Value vs. Growth will start to die down as idiosyncratic risk becomes the key," Wilson said. "Much like 2021, we could see periods of Value and Growth outperformance that is dependent on the market's current posture regarding macro growth and rates. For the moment, we have a slight bias toward Value given its higher leverage to rising interest rates and inflation, which should be with us through year-end." 

Price target as of November 2021

Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter: @emily_mcck

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