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U.S. stocks opened near record highs on Monday, as investors built on momentum from last week into at least the first session of the new year. The S&P 500, Dow and Nasdaq each advanced.
U.S. equities posted another year of solid gains in 2021, rising by 27% and delivering a rare third consecutive double-digit annual percentage increase. Within the S&P 500, the energy and real estate sectors outperformed, gaining more than 42% each during the year for these sectors' best annual gains on record.
Still, the blue-chip index's robust overall rise was powered on a stock-by-stock basis by just a handful of mega-cap names. According to Goldman Sachs analyst David Kostin, the five largest components of the S&P 500 (or Facebook, Apple, Amazon, Microsoft, Google) together returned 37% last year – and now constitute about 23% of the entire index.
"In 2022, variables associated with earnings and valuation will determine the performance of the S&P 500 index and its underlying constituents," Kostin wrote in a note Monday. He expects the index to rise another about 7% to end 2022 at 5,100, with his outlook one among several Wall Street predictions calling for a gain to more than 5,000 for the S&P 500 this year.
"From an earnings perspective, decelerating economic growth will limit sales gains for many companies. Consequently, stock return dispersion will be most evident when viewed through the margin channel," Kostin added. "Stocks with high labor cost ratios and exposure to wage inflation will likely underperform."
But for the S&P 500 as a whole, a 27% rise and 29% total return this past year bodes favorably for the coming period. In the 71 years spanning back to 1950, when the S&P 500 posted a total return of 25% or more in a year, stocks rose 82% of the time the next year, according to data from Truist Advisory Services co-chief investment officer Keith Lerner. However, the magnitude of returns could moderate.
"I think that 2022 is going to be a good year that tends to follow a great year," Sam Stovall, CFRA chief investment strategist, told Yahoo Finance Live late last week. "We certainly have a high wall of worry that we're going to have to scale ... in terms of inflation concerns, what the Fed will be doing with interest rates, et cetera."
And indeed, this week investors will be eyeing new economic data including the Labor Department's December jobs report to help show the relative strength of U.S. economic growth in the final weeks of the year, as inflation concerns and labor shortages continued to ripple across the country. Risks around the latest surge of the coronavirus are also weighing, with impacts to the labor market from the Omicron variant potentially set to show in the final monthly jobs report for 2021.
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