By Chuck Mikolajczak

NEW YORK (Reuters) – Morgan Stanley Analysts see the stock market falling in 2022. This is due to equity markets becoming more volatile with slower earnings growth and bond yields rising. Companies also try to control supply chain disruptions as well as higher input costs.

In a note on Sunday, the firm said it was underweight the benchmark S&P index due to slower earnings per share growth and higher starting valuations versus its global peers, and its base-case target of 4,400 implied downside potential of 5%.

Morgan Stanley’s earnings per share (EPS), view shows that the company sees most growth in Europe, Japan and the United States next year, while it is neutral regarding emerging markets.

The firm expects solid EPS growth in next year but “uncertainty about that expectation rises materially due to cost pressures and supply issues along with tax policy uncertainty that’s unique to the U.S.” the analysts stated. Given the U.S.’s slow recovery in other parts of the globe, there is more opportunity for “catch-up” elsewhere. This will result in less volatility and earnings growth over the next twelve months.

While Morgan Stanley does expect earnings for the S&P 500 overall to be solid, chief U.S. equity strategist Michael Wilson expects “significant” earnings dispersion at the stock level, making the year more about stocks than sectors or styles.

Despite the fact that the company expects sectors and styles to be more volatile the firm still has a healthy weight in healthcare, financials, and real estate. The firm is also underweight in consumer discretionary and tech hardware.