The Highest-Rated Portfolio Strategist Says the Spike in Real Rates Is Just a Start

(Bloomberg) -- While stock investors entered the new year spooked by a jump in Treasury yields, Wall Street's top-ranked strategist offers some soothing words: higher rates are no hurdle to the S&P 500's bull market. 

Dennis DeBusschere, voted as the No. 1 U.S. portfolio strategist in last year's Institutional Investor survey, says his “single highest conviction” call for 2022 is that inflation-adjusted bond yields will go up as the Federal Reserve raises rates and headwinds such as the omicron coronavirus variant and pricing pressures start to fade.  

While higher rates create pressure on companies with lofty equity valuations, the founder of 22V Research firm expects corporate profits to continue to expand amid a strengthening economy. That will help stocks overcome a compression in price-earnings multiples, as it happened in the last 12 months.

The S&P 500 will end this year at 5,040, with company profits growing to $225 a share, DeBusschere predicts. That represents a 7% gain from the index's last close and is above the average forecast of 4,950 a Bloomberg survey of strategists in December. 

“The Fed wants higher real yields and has the tools to make that happen, so investors should position for that outcome,” DeBusschere wrote in a note to clients. “Today, economic growth is above trend, supply-chain risks have eased some, consumer demand is robust, corporate profitability is strong, and financial conditions remain exceptionally easy.”

The real yield on 10-year Treasuries has climbed more than 30 basis points in the first four sessions of 2022, fueling a rout in highly valued technology stocks. While the pace of rate moves is abrupt, DeBusschere views the yield level of minus 0.8% as too negative in an economy that's forecast to grow about 4% this year. 

The strategist advises investors to favor companies poised to benefit from strong economic growth, such as financial, energy and industrial shares. 

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