Covid-19, inflation and tightening of central bank policies. continue to threatenStocks are still enjoying a bull run, although analysts don’t see any serious correction in 2022.

U.S. equity markets suffered their worst start in a whole year last week Lehman Brothers collapseThis was driven further by hawkishness of the Federal Reserve, and a sell off for high-value U.S. tech stocks. On Monday, the trend was continued as global stock markets fell into the red.

One key reason for the unexpected hawkishness of the Federal Open Market Committee’s recent minutes of meetings was the desire of policymakers to increase its balance sheets. Deutsche Bank analysts believe this is a significant factor that was greatly undervalued by the market.

In recent months, the equity outlook has been clouded by the rapid spread of Covid-19 around the globe. Daily caseloads reached record levels and social restrictions were tightened in major economies.

Pictet Asset Management chief strategist Luca Paolini stated Monday that while the Omicron Covid variant might have imposed more restrictions, the economic recovery is resilient nonetheless, so stocks aren’t particularly susceptible to a correction.

Paolini said that the strength of labor markets, pent-up demand for service and strong corporate balance sheets are still key factors in the world’s economic recovery. Pictet will be looking to expand its stocks weight in 2022.

However, he acknowledged that despite strong GDP growth expectations, particularly in the U.S. and Europe, surging inflation does pose some downside risk — and will likely peak in the first half of 2022 along with prompting the Fed to hike interest rates by June.

Pictet is positive about equities. Paolini and his team have taken a neutral tactical stance regarding the whole asset class, given the liquidity situation for the U.S. going negative, stocks still being highly valued, and Pictet’s optimistic outlook.

James Solloway from SEI’s Investment Management Unit struck a similar note last week. He noted that while GDP growth is expected to slow down, labor markets and inflation will tighten. Covid, which has a short-term negative affect, will still have an effect on the economy. However, it should be noted that the global economic system must manage the occasional setbacks.

“Although there have been pockets of speculative behavior in some areas of the financial world — meme stocks, SPACs, cryptocurrencies and NFTs, for example — we do not see the sort of speculative fervor that would point to a serious equity correction in 2022,” Solloway said.

The data suggests that this highly transmissible variant of Omicron may be less severe than previous versions of the virus. However, Mazars Chief Economics George Lagarias stated Thursday that markets must not become complacent about other pandemic-related shocks.

“We cannot allow ourselves to be enticed into trying to determine the timeframe for the endgame, when there is no way to know what the turn will look like.” Lagarias stated that risk at the moment is not linear, but rather parabolic.

It takes just one vaccine-resistant dominant type to reverse months of global vaccinations and throw all predictions out the window.

U.S. valuation vulnerability

Lagarias also highlighted that U.S. stocks, in particular, are expensive and concentrated — a feature highlighted during last week’s weakness among tech behemoths — but noted that investors have few alternatives to stocks in general at present.

According to him, a correction of risk asset prices could be more possible because central banks have made a paradigm shift on quantitative easing. However, inflation continues to pose a problem.

Lagarias explained that all uncertainty can be bad for businesses, however, it’s still not clear what risk assets will do as drivers have been too closely decoupled for far too long.

It could be the argument that ‘there are no alternatives to stocks’ or’residual liquid’ prevails, or that markets enter a ‘fear mode’ where secular volatility increases.

Kristina, Invesco’s global market strategist, predicted a possible correction of the U.S. stock markets in her Top 10 Predictions for 2022.

Hooper indicated that while there will likely be a correction of the US stock markets in 2022’s first half, Hooper expects a quick recovery.

“It’s been so long since we have had a sizeable correction that the odds of one have grown — and increasing the odds is the fact that the Federal Reserve is starting to normalize monetary policy in the first half of 2022 and may start to hike rates.”