Inflation is seen staying above central banks' targets in 2023, according to Credit Suisse.
That will likely prevent the Federal Reserve from cutting interest rates next year, the bank said.
Strategists said 2023 would be a "tale of two halves" with Fed pivot expectations growing over the course of the year.
Any market expectations that the Federal Reserve and other major central banks will be able to start cutting interest rates in 2023 may be misplaced, according to Credit Suisse, because inflation will remain above official targets.
Access to money will stay tight, and ongoing economic and geopolitical risks mean markets will continue to be volatile, analysts at the Swiss bank said in a 2023 outlook report.
That means markets will likely first focus on a "higher rates for longer" theme, which should lead to a muted performance of equity markets, according to the bank. At the same time, borrowing costs reaching a peak means potential opportunities in fixed income.
"Inflation is peaking in most countries as a result of decisive monetary policy action, and should eventually decline in 2023," the strategists led by Philip Lisibach wrote. Still, "it will remain above central bank targets in 2023 in most major developed economies, including the USA, the UK and the Eurozone."
"We do not forecast interest-rate cuts by any of the developed market central banks next year," they added.
A sharp rise in borrowing costs has weighed significantly on financial markets this year.
The Fed hiked its benchmark rate by a jumbo-sized 75 basis points at each of the last four meetings, which has contributed to the benchmark S&P 500 index slipping by just under 17% year-to-date.
'Higher rates for longer'
Some economists expect the central bank to start tempering its tightening stance at its December 15 meeting — but Credit Suisse warned that investors will have to wait until 2024 before it actually starts lowering interest rates.
"We see 2023 as a tale of two halves," strategists at the bank said.
The bank expects the first half to be defined by high interest rates, which will likely support value stocks.
"Markets are likely to first focus on the 'higher rates for longer' theme, which should lead to a muted equity performance," Lisibach's team said. "We expect sectors and regions with stable earnings, low leverage and pricing power to fare better in this environment."
Credit Suisse sees market expectations building in the second half of 2023 for a Fed pivot to a less hawkish policy stance — and that should support growth stocks, which benefit more from lower interest rates because such companies can boost their cash flows through cheaper borrowing.
"Once we get closer to a pivot by central banks away from tight monetary policy, we would rotate toward interest-rate-sensitive sectors with a growth tilt," the bank said.
Credit Suisse also said that the US will be one of the few economies not to slip into a recession next year, with the ongoing war in Ukraine and rising rates weighing on growth.
The UK, Eurozone, and Chinese "economies should bottom out by mid-2023 and begin a weak, tentative recovery – a scenario that rests on the crucial assumption that the USA manages to avoid a recession," strategists said. "Economic growth will generally remain low in 2023 against the backdrop of tight monetary conditions and the ongoing reset of geopolitics."
The bank expects US gross domestic product to grow just 1.5% on average over the next five years – a decline from the 2.2% figure logged between 2010 and 2019.
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