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Wall Street’s 2023 Outlook for Stocks

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It’s that time of year when Wall Street’s top strategists tell clients where they see the stock market heading in the coming year.

Typically, the average forecast for the group predicts the S&P 500 will climb about 10%, which is in line with historical averages.

This time it’s the pros unusually careful with most expect The S&P will end 2023 lower than where it is today.

There are hundreds of pages of research and analysis that accompany these strategists’ forecast. The general themes: Most Wall Street firms expect the U.S. economy to enter recession sometime in 2023. Many believe that 2023 earnings forecasts have more room to be cut, and some believe that these downward revisions mean a lot of volatility for stocks in the early part of 2023. At the same time, many also expect a clear drop in inflation, which will give the Federal Reserve clearance to ease its hawkish monetary policy. At least some strategists believe that if economic conditions worsen significantly, the Fed may even go back to cutting interest rates.

Wall Street’s 2023 Outlook for Stocks

Wall Street is unusually skeptical about 2023. (Image: Getty)

Putting it all together, strategists expect a volatile first half to be followed by a lighter second half, which could send stocks climbing modestly higher.

Below is a summary of 16 of these 2023 forecasts for the S&P 500, including highlights from the strategists’ commentary. Targets range from 3,675 to 4,500. The S&P closed Friday at 4,071, implying a return of between -9.7% and +10.5%.

  • Barclays: 3,675, $210 EPS (as of November 21, 2022) “We recognize some upside risks to our scenario analysis given post-peak inflation, strong consumer balances and a robust labor market. But current multiples are baking in a sharp moderation in inflation and eventually a soft landing, which we continue to believe is a low-probability event.”

  • Societe Generale: 3,800 (as of November 30) “Bearish, but not as bearish as 2022, as the yield profile should be much better in 2023 as Fed hikes come to an end for this cycle. Our “hard soft landing” scenario sees EPS growth rising back to 0% in 2023. We expect the index to trade in a broad range as we see negative earnings growth in 1H23, a Fed central bank in June 2023, and China reopens in 3Q23 and a US recession in 1Q24.”

  • Capital economy: 3,800 (as of October 28) “We expect global economic growth to disappoint and the world to slide into recession, resulting in more pain for global equities and corporate bonds. But we don’t expect a particularly prolonged downturn from here: by mid by 2023 or so, the worst may be behind us and risky assets may, in our view, start to rally again on a more sustained basis.”

  • Morgan Stanley: 3,900, $195 EPS (as of Nov. 14) “This puts us 16% below consensus ’23 EPS in our base case and down 11% from a year-over-year growth standpoint. After what remains of this current tactical rally, we see the S&P 500 discounting ’23 earnings risk sometime in Q123 via a ~3,000-3,300 price floor. We believe this is ahead of the eventual bottoming out in EPS, which is typical of earnings recessions.”

  • UBS: 3900, $198 EPS (as of November 8) “With UBS economists predicting a US recession for Q2-Q4 2023, the setup for 2023 is essentially a race between easing inflation and financial conditions versus the coming battle for growth+earnings. History shows that growth and earnings continue to weaken into market bottoms before the financial conditions ease significantly.”

  • Citi: 3,900, $215 EPS (as of Nov 18) “ Implicit in our view is that multiples tend to widen coming out of recessions as EPS in the denominator continues to fall while the market starts to price in recovery on the other side. However, part of this multiple expansion has a price connection. The monetary policy impulse to lower interest rates lifts multiples as the economy works its way out of the depths of recession.”

  • BofA: 4000, $200 EPS (as of Nov. 28) “But there’s a lot of variety here. Our bull case, 4600, is based on our sell-side indicator being as close to a ‘buy’ signal as it was in previous market bottoms – Wall Street is bearish, which is bullish. Our bear case from stressing our signals yields 3,000.”

  • Goldman Sachs: 4,000, $224 EPS (as of Nov. 21) “The outlook for US stocks in 2022 was about a painful decline in value, but the stock story for 2023 will be about the lack of EPS growth. Zero earnings growth will match zero appreciation in the S&P 500.”

  • HSBC: 4,000$225 EPS (as of October 4) “…we believe valuation headwinds will persist well into 2023, and most of the downside in the coming months will come from declining profitability.”

  • Credit Suisse: 4,050$230 EPS (as of October 3) “2023: A year of weak, non-recessionary growth and falling inflation”

  • RBC: 4100$199 EPS (as of Nov. 30) “We think the path to 4100 is likely to be choppy in 2023, with a potential retest of the October lows early in the year as earnings forecasts are cut, Fed policy approaches a transition (stocks tend to to fall ahead of final cuts), and investors are digesting the start of a challenging economy.”

  • JPMorgan: 4,200$205 (as of December 1st) “…we expect market volatility to remain high (VIX averaging ~25) with another round of declines in equities, especially after the year-end run-up we’ve been calling for and the S&P 500 multiple approaching 20x. More precisely, in 1H23 we expect the S&P 500 to retest year-to-date lows as the Fed tightens on weaker fundamentals. This sell-off coupled with disinflation, rising unemployment and falling business sentiment should be enough for the Fed to begin to signal a pivot, then drive an asset recovery and push the S&P 500 to 4,200 by the end of 2023.”

  • Jefferies: 4,200 (as of Nov. 11) “In 2023, we expect bond markets to seek the Fed’s terminal rate, while equity markets will be in ‘no man’s land’ with earnings continuing to decline as growth and margins disappoint.”

  • BMO: 4,300, $220 EPS (as of Nov. 30) “We still expect an S&P 500 rally in December, even if the stock falls short of our 2022 year-end 4,300 target. Unfortunately, we think it will be difficult for stocks to end 2023 much higher than current and expected levels given the ongoing tug of war between Fed messages and market expectations.”

  • Wells Fargo: 4,300 to 4,500 (as of August 30) “ Our single and consistent message since early 2022 has been to play defense in portfolios, which practically means making patience and quality our daily watchwords. Sticking to these words means that long-term investors in particular can use patience to potentially use time to their advantage. While we await any economic recovery, the long-term investor can use available cash to grow the portfolio gradually and in a disciplined manner.”

  • Deutsche Bank: 4,500, $195 EPS (as of Nov. 28) “Stock markets are projected to move higher in the short term, plunge as the US recession hits and then recover fairly quickly. We see the S&P 500 at 4,500 in the first half of the year, down more than 25% in Q3, and back to 4,500 by the end of 2023.”

The range of forecasts is quite wide this year, and therefore different surveys give very different results. Bloomberg surveyed 17 strategists who had an average forecast of 4,009. Reuters poll of 41 strategists revealed a median forecast of 4,200. (CNBC publishes its survey here, but it has not yet been updated with a 2023 target.)

🙋🏻‍♂️ I want to say two things about one year course goals.

First, don’t obsess over these one-year goals if you don’t have to. Here is what I wrote last December:

⚠️ It’s incredible difficult to predict with any accuracy where the stock market will be in a year. In addition to the countless number of variables to consider, there is also the completely unpredictable development that takes place along the way. Strategists will often revise their goals as new information comes in. In fact, some of the numbers you see above represent revisions from previous forecasts. For most of you, revising your entire investment strategy based on a one-year stock market forecast is probably a bad idea. Still, pursuing these goals can be fun. It helps you get a sense of the various Wall Street firms’ level of bullishness or bearishness.

Second, most of the stock strategists TKer produces follow incredibly rigorous, high-quality research that reflects a deep understanding of what drives the markets. The most valuable things these pros have to offer have little to do with one-year goals. (And in the years I’ve interacted with many of these folks, at least a few of them don’t bother to publish one-year goals. They do it because it’s popular with clients.) Don’t dismiss all their work just because their one-year target is off target. And don’t be surprised to see me highlight their views in future newsletters.

Good luck in 2023!

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Sam Ro is the founder of Follow him on Twitter at @SamRo

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