By Caroline Valetkevitch

NEW YORK, (Reuters) – Profit growth in the United States is likely to slow down next year following a gangbuster 2021. Rising inflation and a fast spreading COVID-19 variant are adding uncertainty to investors trying to justify stock market trading at record highs.

It is expected to increase by approximately 24% in this year. The index’s long-term price-to earnings ratio stands well above the average. This raises concerns that the market might be too overbought.

S&P 500 earnings are seen up about 8% in 2022 after an estimated 50% jump this year, when companies rebounded from lockdowns and recession in the early stages of the pandemic, according to IBES data from Refinitiv.

Wall Street’s consensus 2022 estimates are unchanged despite stock indexes losing ground because of concerns over the Omicron variant spreading so quickly.

Robert Phipps (director at Per Stirling Capital Management, Austin, Texas) said, “We’re moving into an environment that we’re likely will see multiple expansion and multiple compression.” This is when earnings rise but share prices don’t follow suit. Investors are left with very little to no reward.

The forward price-to-earnings ratio for the S&P 500 is at 21.5, compared with its long-term average of 15.5, according to Refinitiv DataStream.

Ultra low interest rates have been a key support for valuations. This is expected to change with the Federal Reserve becoming more hawkish as inflation fears rise, Phipps stated.

Higher interest rates can increase the cost of borrowing for consumers and businesses, and lower stock multiples for tech stocks and others that are growing fast.

Fed’s announcement last week that it will end pandemic-era bonds purchases in March was driven by tightening labor markets and a stronger economy. That could open the door for three quarter-percentage-point interest rate increases by the end of 2022.

Fed policymakers forecasted that inflation would rise to 2.6% in the next year. This is higher than what they had predicted back September.

Companies are also still experiencing supply disruptions from the pandemic. This appears to be entering an intensified phase, as Omicron cases rise around the world.

Some countries were concerned about the possibility of a faster spread or renewed restrictions ahead of the holiday. A Reuters tally shows that U.S. cases of COVID have increased 50% in the past month.

Christopher Harvey, U.S. Equity Strategy head at the company said that “there are many things that could go wrong.” Wells Fargo Securities (NYSE:) Increased chances of a 10% decline in the market by next summer

U.S. businesses managed to maintain profit margins this year due to their ability to reduce costs and pass on high prices to customers.

However, it is not clear how the most recent risks could affect 2022 earnings and results.

Estimated 2022 S&P 500 earnings growth was at 8.3% as of Friday, compared with 8.0% at the start of December, according to Refinitiv data.

Nick Raich CEO, independent research company The Earnings Scout, stated that Omicron was not included in the earnings estimates for December.