Wall Street analysts are backing these global stocks to beat Big Tech next year

Published Wed, Dec 22 20216:30 PM EST

Stock market strategists broadly expect the bull run for U.S. tech behemoths to moderate next year, and have begun to favor recently unloved sectors going into 2022. Sectors such as financials, materials and energy have been identified by analysts across major banks and investment firms as potential sources of opportunity in a shifting macroeconomic environment. There is some consensus among strategists that the soaring valuations reached by the likes of Facebook (Meta), Amazon , Apple , Netflix , Google-parent Alphabet (FAANG stocks) and Tesla in recent years are unsustainable. The performance of these stocks, although broadly strong through 2021, has tailed off in recent months. At a recent investment roundtable, JPMorgan Head of Global Equity Strategy Mislav Matejka said movement in the yield curve would be key to assessing the changing equity landscape in 2022. The yield curve shows the relationship between short-term and long-term interest rates of U.S. Treasury notes. Usually, the longer the duration, the higher the interest rate, but when the rates draw closer to one another, the yield curve flattens. An inversion of the curve is typically seen as a warning signal for the market. "The yield curve has been flattening which allowed quality Nasdaq, technology, FAANG, defensive leadership since March to be re-established, after the market had a very cyclical leadership after the vaccine announcements from last October into March," he explained. "We think the yield curve re-steepens again, real rates go up, nominal bond yields pick up, which will help beta plays to pick up, and emerging market plays." In particular, JPMorgan is bullish on banks, energy, autos and mining, and Matejka's team hold overweight positions in Barclays , UBS , ING , BP and Volvo . After a strong run for tech stocks, Matejka's team has now taken some profits and returned to neutral positioning on the sector. Matejka also pointed out that while the MSCI World index is up more than 100% from its March 2020 lows, the MSCI China index is down 35% from its February high, as real estate debt fears and regulatory crackdowns weighed on markets in the world's second-largest economy. He projected that China has almost 30% upside next year, with a cyclical slowdown and tightening of monetary policy having "run its course." "These parts of technology which have held the market very strong, you should be taking profits there and upgrading some of the China and the EM plays, such as we upgraded mining," he added. Europe taking the reins The shift from U.S. tech was echoed last week by Matteo Cominetta, senior economist at Barings Investment Institute, who said a slowing economy coupled with accelerating inflation is a "most indigestible mix" for high valuation, low dividend stock such as Big Tech. On the contrary, Cominetta said having a smaller presence in high growth sectors could be a blessing for European equities, with financials, which are overrepresented in European indexes, potentially finding a more supportive interest rate environment. "Another advantage for EU equities is policy divergence, as the ECB is likely to have an easier job than the Federal Reserve next year," Cominetta added. "Policy rates will likely rise earlier and faster in the U.S., equity multiples should then come under more pressure there and the dollar should appreciate, another headwind for U.S. equities. Solid growth without overheating should instead provide a supportive environment for EU equities." One European stock that has appeared across analyst "buy" recommendations in recent weeks, aside from the likes of Deutsche Bank, Barclays and Invesco, is diabetes giant Novo Nordisk . Barclays strategists noted that a mid-term update on the Danish pharmaceutical company's obesity products at its Capital Markets Day in the first quarter of 2022 could serve as a catalyst, with analysts expecting an upward revision to its 2025 sales target. The likes of GSK , Roche , Sanofi and AstraZeneca are also ever-present on "buy" lists. 'Golden era for a golden asset class' Bank of America earlier this month deemed European infrastructure a "golden asset class" entering a "golden era," with the sector boasting an investable universe of stocks valued at 700 billion euros ($788.9 billion) comprising asset-heavy companies in utilities, transport and telecoms. "Over the past two decades, this 'golden asset class' has more than doubled the compound annual return of European equities," said Candace Browning, head of BofA Global Research. "Furthermore, infrastructure is now entering a 'golden era,' as reaching net zero emissions requires a global infrastructure overhaul, and €2T worth of government-sponsored COVID stimulus is put to work." Bank of America's buy-rated picks include Iberdrola and Eiffage , along with Cellnex, Vantage Towers , Vinci , Terna and E.On at the subsector level.

Wall Street and Broad St. signs are seen as New York Stock Exchange building decorated for Christmas at the Financial District in New York City, United States on December 16, 2020.

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Stock market strategists broadly expect the bull run for U.S. tech behemoths to moderate next year, and have begun to favor recently unloved sectors going into 2022.