Despite being another tumultuous year amidst a worrying pandemic and massive supply chain disruptions, 2021 proved to be another annus mirabilis for the U.S. economy, with the year marking the fastest economic growth since Ronald Reagan declared that it was “morning again in America,” nearly four decades ago. Estimates of last year’s economic growth vary, with the Federal Reserve Bank of Atlanta estimating GDP growth of 7.6% during the final quarter of the year, up from 2.3 per cent in the third quarter, while business research group, the Conference Board, estimates a 5.6% growth clip for the entire year.

The U.S. stock market bull run showed nos signs of slowing down, with the broad market benchmark S&P 500 managing to finish with a gain of 26.9% for the year, or a total return of 28.7% when you throw in dividends. 

Energy and real estate were the best-performing sectors last year after surging more than 40% each while consumer staples and telecommunications were the market laggards--but still managed to finish with double-digit gains.

The majority of Wall Street and professional economic prognosticators expect the broad market bullishness to extend into 2022, albeit in a weakened state. Goldman Sachs is predicting 3.8 per cent GDP growth; Bank of America says 4% while the Conference Board is predicting growth of 3.5%. At first glance that might not look like much, but is actually impressive when you consider that the annual rate of growth never hit 3% in the decade before the pandemic.

Analysts are acutely aware that the Covid years have been littered with predictions that never panned out, with the pandemic triggering some serious market idiosyncrasies.For starters, Goldman Sachs points out that equity market breadth has narrowed sharply, with just five stocks accounting for 51% of the S&P 500’s return since the end of April.

In fact, Microsoft (NASDAQ:MSFT), Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL), Apple (NASDAQ:AAPL), Nvidia (NASDAQ:NVDA) and Tesla (NASDAQ:TSLA) have accounted for more than one third (920 bp) of the S&P 500’s return. 

"After contributing over double their starting weight to the index’s return, these stocks now make up 22% of the S&P 500 by market cap, a 4 pp increase from the start of the year," David Kostin, chief U.S. equity strategist and team has written in a note.

Kostin says that following a period of similar market breadth "equities have historically exhibited weaker-than average returns and deeper drawdowns, but it has historically taken 4 additional months before a sustained increase in breadth takes hold and market leadership flips towards the previous laggards. Record index concentration is both a cause and a symptom of a narrow market."

Nevertheless, Goldman says that it's unlikely there will be a near-term recession with earnings and margins still improving. GS recommends owning high growth, high margin stocks, which have not only outperformed in recent months but are also likely to continue doing so in the coming year.

Bearing this in mind, Bloomberg Economics has laid out several risk factors that could threaten the ongoing bullish thesis. Here are the most egregious.

#1. Omicron and More Lockdowns

Last week, the World Health Organization (WHO) warned that the Omicron coronavirus variant carried a very high risk of infection surges, with border closures by more countries now casting a shadow over an economic recovery from the two-year pandemic.

But the markets appear to be more spooked by comments by Moderna chief executive Stéphane Bancel who warned that existing vaccines will be much less effective at tackling Omicron than earlier strains of coronavirus, adding that it would take months before pharmaceutical companies could manufacture Omicron-specific vaccines at scale. 

“There is no world, I think, where [the effectiveness] is the same level . . . we had with [the] Delta [variant]. I think it’s going to be a material drop. I just don’t know how much because we need to wait for the data. But all the scientists I’ve talked to . . . are like, ‘This is not going to be good’,”  Bancel has told the Financial Times.

Bancel says scientists are particularly worried because 32 of the 50 mutations in the Omicron variant are on the spike protein, which current vaccines focus on to boost the human body’s immune system to combat Covid. Most experts did not expect such a highly mutated variant to emerge in less than a year or two.

Not everybody agrees with Bancel, though.

The Moderna chief’s comments have come at a time when many public health experts and politicians have been trying to strike a more upbeat tone about existing vaccines’ capacity to protect against Omicron.

Scott Gottlieb, a director of Pfizer and a former  US Food and Drug Administration (FDA), told CNBC: “There’s a reasonable degree of confidence in vaccine circles that [with] at least three doses . . . the patient is going to have fairly good protection against this variant.” 

Moderna and Pfizer have become the leading vaccine suppliers for most of the developed world. 

More encouragingly, it’s early days into the Omicron era but so far, most cases have been relatively mild. In fact, WHO has pointed out this observation, and urged countries to apply "an evidence-informed and risk-based approach" to travel measures instead of resorting to blanket bans.

At this juncture, it’s too early for a definite verdict on the omicron variant of Covid-19. A more contagious and deadly variant would definitely drag on economies, with even a three-month return to the toughest 2021 restrictions slowing down growth considerably.

In such a scenario, demand would be weaker and the world’s supply problems would likely persist, with workers kept out of labor markets and further logistics snarl-ups. Already this month, the Chinese city of Ningbo--home to one of the world’s busiest ports--has seen fresh lockdowns.

#2. The Inflation Threat

At the beginning of 2021, nearly everybody thought that inflation would be merely transitory and the market consensus was that the U.S. would end the year with 2% inflation. Instead, that number is now closing on 7%

In 2022, once again, the consensus expects inflation to end the year close to target levels. We cannot exactly rule out another awful miss.

Omicron is just one of the several potential threats; rising commodity prices, supply chain disruptions, worsening tensions between Russia and Ukraine, and worsening climate change could easily throw a wrench into the works.

 The combined impact of these threats could trigger a stagflationary shock to the markets.

#3. China Hits a Great Wall

After several near-misses, China’s economy finally ground to a halt in the third quarter thanks to the accumulated weight of the Evergrande real estate slump, repeated Covid lockdowns, and energy shortages. The Middle Kingdom only managed to eke out a 0.8% growth clip in the quarter, a far cry from the  6% pace to which the world has become accustomed.

The worrying fact is that whereas the energy crunch is likely to ease in the coming year, there’s no end in sight for the other two problems. Beijing has adopted a zero-tolerance policy for the pandemic, meaning any new breakouts are likely to lead to further lockdowns. Bloomberg Economics’ base case is for China to grow 5.7% in 2022; a slowdown to 3% would be enough to send ripples across the globe, leaving commodity exporters short of buyers and potentially derailing the Fed’s plans.