The stock market sectors to buy in 2022

A top Wall Street bank has published its view on which sectors we should own over the next 12 months and the ones we should avoid.

A 2022 stock market outlook recommending investors are overweight in financials but underweight on cyclicals and miners has been published by a Wall Street bank.

Bank of America's European equity strategy report is driven by expectations that 2022 will be a “year of payback”, as economic growth slows back towards trend and bond yields rise due to the withdrawal of monetary stimulus.

The Europe-focused note, which was compiled prior to the turbulence caused by the Omicron variant, contains plenty of read-across relevant to investors in the UK.

For example, the bank expects that a stronger US dollar in combination with softening global growth momentum will weigh on commodity prices. This keeps it underweight rating on energy stocks and prompted it to lower mining from market-weight to underweight.

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In contrast, the bank is overweight on financials given expectations for further bond yield upside. It notes that banks' correlation with US bond yields has increased over recent years, with the sector only joining the recovery rally once yields began rising in September last year.

Bank of America sees further upside for US bond yields as the Federal Reserve turns increasingly hawkish in response to rising inflationary pressures.

This was highlighted overnight when Fed chair Jerome Powell dropped the term “transitory” in relation to inflation and signalled the central bank may quicken the pace of winding down America's massive bond-buying programme.

While Bank of America is overweight banks, expectations of higher yields have also kept it overweight on insurance. However, it sees diversified financials, such as exchanges and investment banks, as being more sensitive to the growth cycle than to rates.

The bank is mildly overweight on defensives, but with a key overweight in utilities.

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The strategy note said: “Our envisaged scenario of further bond yield upside on the back of more hawkish central banks makes it hard for us to turn decisively overweight defensives, as these typically only outperform in periods of falling yields.

“That said, utilities are among our key sector overweights, as they tend to outperform when Euro area growth slows.”

The bank is underweight in pharmaceuticals due to expectations that rising US bond yields will outweigh the boost from a stronger US dollar.