By Senad Karaahmetovic
2022 has been a year to forget for stock market investors. As of December 23, the S&P 500 is down almost 20% year-to-date (YTD). After three consecutive years of positive returns, the benchmark U.S. stock market index is set to record the worst annual performance since 2008.
2022 - A challenging year for investors
The global stock market experienced a massive pullback on the back of the decades-high inflation and extremely aggressive tightening by the world’s major central banks, led by the U.S. Federal Reserve.
While the energy sector outperformed, some COVID-beneficiaries - like DocuSign (NASDAQ:DOCU), Roku (NASDAQ:ROKU), and Peloton (NASDAQ:PTON) - got obliterated. Tech-heavy NASDAQ Composite index is down nearly 33% YTD.
Fed’s historic shift saw the central bank raise interest rates by a cumulative 4.25% this year. Fed Chair Jerome Powell said on several occasions that the Fed has “more work to do” when it comes to bringing inflation down.
Goldman Sachs analysts expect the Fed to further increase its benchmark interest rate to 5.0-5.2%.
“We are skeptical that the FOMC will cut the funds rate until the economy is threatening to enter recession, and we do not expect this to happen next year,” Goldman strategists said in a client note.
What is the outlook for 2023?
Even mega-cap names weren’t immune to the broader stock market selloff. Meta Platforms (NASDAQ:META) and Tesla (NASDAQ:TSLA) are both down 65% YTD, while Amazon (NASDAQ:AMZN) is down nearly 50%.
While the 2022 selloff in the S&P 500 has been mostly driven by inflation and central bank tightening, equity strategists believe the next leg lower will be driven by negative estimates revisions.
The current market consensus expects the S&P 500 to earn around $216 in 2023. More bullish analysts see the S&P 500 earnings at about $220, which implies approximately flat growth compared to 2022.
On the other hand, a more bearish group of equity analysts believes the EPS will decline by about 10% to $200. The most vocal bears include analysts from Morgan Stanley and Bank of America.
"We remain highly convicted in our view that the bear market in stocks will not be over until the S&P 500 reaches the range of our Base and Bear case tactical targets – i.e.,3000-3400, later this fall," Morgan Stanley analysts told clients in September.
So, where do we stand for 2023? The average price target for the S&P 500 at the moment is 4,080. This is based on forecasts by 23 analysts.
Top Street strategists share their S&P 500 forecasts for 2023
Here are views from 5 prominent Street strategists on what investors can expect from the S&P 500 in 2023.
JPMorgan: “We expect market volatility to remain elevated (VIX averaging ~25) with another round of declines in equities, especially after the run-up into year-end that we have been calling for and the S&P 500 multiple approaching 20x. More precisely, in 1H23 we expect S&P 500 to re-test this year’s lows as the Fed overtightens into weaker fundamentals.”
“This sell-off combined with disinflation, rising unemployment, and declining corporate sentiment should be enough for the Fed to start signaling a pivot, subsequently driving an asset recovery, and pushing S&P 500 to 4,200 by year-end 2023.”
Bank of America: “We stay bearish risk assets in H1, likely turn bullish H2; market narrative to shift from Inflation and rates “shocks” of ’22 to recession and credit “shocks” in H1’23, thereafter more bullish story of “peaks” in inflation, Fed funds, bond yields and US dollar in H2’23.”
“2023 set-up into 2023 less bearish than into 2022; bear market in bonds & stocks means much greater investor pessimism versus year ago; and v unlikely central banks hike rates another 280 times in ‘23; BofA expected returns cautiously positive.”
Morgan Stanley: “Consensus projections still call for S&P 500 earnings per share (EPS) of approximately $220 for 2022 and $230 for 2023—implying year-over-year growth. Such a scenario fails to account for the likelihood that companies will simultaneously encounter declining volumes and loss of pricing power, ushering in powerful negative operating leverage.”
“Our 2023 EPS forecast for the S&P 500 of $195 is consistent with a 15% to 20% retreat from the current index price, which we expect to be followed by recovery through year-end to a level essentially flat with today.”
Citi: “Next year’s recession risk remains a key focus. Implicit in our S&P 500 index price and earnings expectations is the view that this may be the most widely anticipated recession in decades. Thus, investors need to allow that historic recession comparisons may need context.”
“Citi’s US economists project a 2H ’23 recession. Yet, we suspect fundamental and performance effects will be felt during 1H. The key debate is how much recession risk is priced in. The S&P 500 PE has already contracted to post-Tech bubble levels. Our view is that the multiple contraction impact of rising rates is mostly behind. From here, the earnings outcome becomes most relevant. Although consensus expectations still look aggressive, we argue that ’23’s earnings decline will be less than expected relative to historic recession analogies.”
Jefferies: “US equities are receiving conflicting signals – a softening dollar (reflationary), a deep curve inversion (difficult for growth) and moderating inflation expectations (good for long duration assets). The vagaries of lag effects on different sectors account for the bulk of the confusion. China is set to provide a counter-trend to the US slowing down, confusing the picture even further in 2023.”
“We expect negative EPS growth of 6.5% in 2023 (EPS integer: 204) with an unchanged S&P 500 target of ~4,200 – the latter helped by the fall in US treasuries.”
Conclusion
The stock market has had a difficult year and many analysts don’t expect much from the upcoming year of 2023. While the consensus is building for a selloff in the first half of the next year on the back of negative estimates revisions, the next year may finally yield an ultimate buying opportunity before the Fed is eventually forced to start cutting rates in 2024 to support the economy in recession.