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The U.S. stock market, as measured by the S&P 500 index, may struggle to rise next year amid similarities to the technology bubble of 2000, according to BofA Global Research. 

The S&P 500 SPX, +1.32% will end 2022 at 4,600, BofA Global Research predicted in an equity and quant strategy note dated Nov. 23. That’s down about 1% from the index’s close of 4,655.27 Monday, as U.S. stocks partially rebounded from Friday’s selloff that had been sparked by fears over the omicron variant of the coronavirus. 

That’s a “pretty flat market from here,” Savita Subramanian, head of equity and quant strategy at BofA, said Monday during an online media briefing on the firm’s U.S. economic and stock-market outlook for 2022. “Unfortunately we see a lot of similarities between today and 2000 — the tech bubble peak,” she said, pointing to “lofty expectations,” Wall Street strategists increasing their stock allocations by almost 20 percentage points and “lots of IPO activity.”

But “the bubble today” is in bonds, not stocks, said Subramanian, with investors expecting negative real interest rates despite that being previously “unthinkable.” Back in 2000, investors had accepted that the equity risk premium was negative, she said, calling that a “prescient sign” at the time that the market was overvalued with areas of “bubble-like froth.”

“You want to avoid stocks that behave like bonds or are hurt by rising interest rates,” said Subramanian. “We like small caps RUT, -0.18% over large caps,” she said, as well as “value over growth.”

Read: Omicron variant may delay ‘breakout’ performance of these stock-market trades, RBC says

In Subramanian’s view, the S&P 500 has become “a long duration bond,” with investors paying for “a lot of backend-loaded growth.” The past decade has favored “big growth stocks with lots of growth way out in the future as discount rates have fallen,” she explained. But the BofA report shows the strategists are now expecting a higher discount rate as the Federal Reserve may begin hiking rates next year.

The price of the S&P 500, which measures the performance of U.S. large-cap stocks in the U.S., has risen about 24% this year through Monday, FactSet data shows.

In 2022, “we’re looking for 13% dividend growth, with the “action” taking place in total return rather than price return for the S&P 500, said Subramanian. “Get ready for a total return world.”

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