The S&P 500 will cross 5,000 next year as companies make 'excess profits' and trillions of dollars in spending are unleashed, says Jefferies

• The S&P 500 will extend gains into 2022 and reach 5,000, says Jefferies in a stock market outlook note Tuesday.
• Stocks will find support from further earnings growth and a massive amount of money to be spent by consumers, companies, and the US government.

Numerous record highs have pushed the S&P 500 up by 25% during 2021, and the benchmark should advance to the 5,000 mark in 2022 on continued earnings growth for Corporate America and a massive amount of spending to support further US economic expansion, Jefferies said Tuesday.

"The nominal profit boom is set to be repeated in 2022. The gap between nominal GDP and treasury yields will be wide enough for companies to make excess profits," said Sean Darby, global equity strategist at Jefferies, in a research note looking at factors that will influence US and global stock markets next year.

Surging corporate earnings have helped fuel the S&P 500's jump this year, with the benchmark nearing 4,700 and notching 66 record highs in the process.

Strong pricing power could help annual earnings growth of about 50% in 2021 look "quite plausible," Darby wrote, noting Jefferies had previously estimated 41% earnings growth for the S&P 500.

"The lesson learnt from the post-pandemic recovery is the danger of underestimating corporate pricing power and the degree to which central banks are happy to leave real interest rates negative – more like the 1950s. There is a very strong positive correlation between nominal GDP and US profits," the strategist wrote.

Jefferies foresees US gross domestic product expanding by 5.1% in 2022, faster than other parts of the world including the euro area.

Darby cited spending from US consumers, corporations, and government — possibly even banks too — as drivers of economic growth next year.

In fact, Jefferies said American consumers have $2.5 trillion of excess savings, S&P 500 companies have gross cash and cash equivalents of $1.34 trillion, and the US government's fiscal stimulus plans are still unfolding — all potential funds that will help foster growth in the world's largest economy next year.

The Federal Reserve will likely act as a modest headwind by raising interest rates twice in 2022 and tapering its assets purchases possibly earlier than expected. "However, US real interest rates will remain deeply negative," said Jefferies. Real interest rates are adjusted for inflation. Consumer price inflation in October hit 6.2%, the fastest rate since 1990, largely as energy prices accelerate.

The US economy appears on track to grow by a faster rate in 2021, at 5.4%, versus next year.

"2022 will be tough because 2021 is unsurpassable. While naturally base effects will play their part, a glance at the recent ISM manufacturing saw the gap between new orders and inventories starting to shrink," said Darby, noting the trend in services — the bulk of the US economy — was better.