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Friday, December 9, 2022
Wall Street strategists are looking ahead to 2023.
And like most years, this year's outlooks contain a degree of similarity from firm to firm.
But the surprising wrinkle for next year is that many full-year forecasts contain not just one, but two distinct predictions about the stock market's path in 2023.
Because not only do a number of firms think stocks will be flat next year, but many strategists are also calling for this bear market to decline to new lows before a stabilization in the second half of the year.
In a note to clients published Thursday, Capital Economics' chief markets economist John Higgins wrote: "We suspect that the S&P 500 will make a new cyclical low by the spring of 2023 as a shallow recession gets underway in the US, before rebounding to end next year higher than it is now."
Higgins said the firm's final forecast for the S&P 500 next will be finalized after next week's Fed meeting.
Writing in a note to clients late last month, Goldman Sachs's equity strategy team wrote: "We forecast a lower path for stocks in the near term as rates rise. But the tightening cycle will end in May and investors in 2H will shift their focus to growth in 2024. Our 3- and 6-month targets are 3600 (-9%) and 3900 (-2%)."
In the case of a "hard landing" where the economy tips into a sharp recession as a result of the Fed's rate hiking plans, Goldman suspects the damage will be even worse for the stock market.
And when we read through the broad collection of Wall Street forecasts tabulated by TKer's Sam Ro last weekend, the theme of an early '23 sell-off before a more constructive environment emerges later next year comes up again and again.
Strategists at JPMorgan, "expect S&P 500 to re-test this year’s lows as the Fed overtightens into weaker fundamentals."
Over at RBC, Lori Calvasina's equity strategy team wrote: "We think the path to 4,100 is likely to be a choppy one in 2023, with a potential retest of the October lows early in the year as earnings forecasts are cut, Fed policy gets closer to a transition (stocks tend to fall ahead of final cuts), and investors digest the onset of a challenging economy."
At Morgan Stanley, Mike Wilson's team wrote: "After what's left of this current tactical rally, we see the S&P 500 discounting the '23 earnings risk sometime in Q123 via a ~3,000-3,300 price trough. We think this occurs in advance of the eventual trough in EPS, which is typical for earnings recessions."
Brian Belski's team at BMO wrote: "[The] market is likely to experience periods of heightened volatility (in both directions) during 1H'23 until overall levels of inflation trend down closer to historical norms throughout the second half of the year. In fact, we believe it is entirely possible for the S&P 500 to retest its current cycle low or even establish a new one — although if that does happen it is not likely to be much lower than the previous one, in our view, and in no way alters our outlook."
And so on.
The pivot point for many of these forecasts, of course, is when the U.S. economy falls into recession. And most Wall Street economists see the first half of next year as the tipping point for the current economic expansion.
Though, as Belski's team at BMO flagged, the calendar year during which the economy enters a recession has seen the S&P 500 rise 5.8%, on average. And as investors have seen this year, waiting for the punch is the hardest part in markets.
Why an economy in recession sets the table for better performance from the stock market comes down to how the Fed will react. If investors have learned one lesson in 2022, it's that higher rates are a problem for most stocks.
And in a recession, the Fed is more likely to cut interest rates — or at least stop raising them aggressively.
Investors will find out next week if Fed chair Jay Powell agrees.
And whether Wall Street's two-part forecast for the year ahead looks any more likely to come through.
What to Watch Today
8:30 a.m. ET: PPI Final Demand, month-over-month, November (0.2% expected, 0.2% during prior month)
8:30 a.m. ET: PPI Excluding Food and Energy, month-over-month, November (0.2% expected, 0.2% during prior month)
8:30 a.m. ET: PPI Excluding Food, Energy, and Trade, month-over-month, November (0.1% expected, 0.2% during prior month)
8:30 a.m. ET: PPI Final Demand, year-over-year, November (7.2% expected, 8.0% during prior month)
8:30 a.m. ET: PPI Excluding Food and Energy, year-over-year, November (5.9% expected, 6.7% during prior month)
8:30 a.m. ET: PPI Excluding Food, Energy, and Trade, year-over-year, November (4.7% during prior month)
10:00 a.m. ET: Wholesale Trade Sales, month-over-month, October (0.3% during prior month)
10:00 a.m. ET: Wholesale Inventories, month-over-month, October final (0.8% during previous month)
10:00 a.m. ET: University of Michigan Sentiment, December Preliminary (56.9 expected, 56.8 during prior month)