It’s that time of year when Wall Street’s top strategists tell clients where they see the stock market heading in the year ahead.
Typically, the average forecast for the group predicts the S&P 500 climbing by about 10%, which is in line with historical averages.
This time around, the pros are unusually cautious with most expecting the S&P to end 2023 lower than where it is today.
There’s hundreds of pages of research and analysis that come with these strategists’ forecast. The general themes: Most Wall Street firms expect the U.S. economy to go into recession some time in 2023. Many believe forecasts for 2023 earnings have more room to get cut, and some believe those downward revisions mean lots of volatility for stocks in the early part of 2023. At the same time, many also expect an unambiguous drop in inflation, which would give the Federal Reserve the clearance to ease up on its hawkish monetary policy stance. At least some strategists think if economic conditions deteriorate significantly, the Fed may even return to cutting interest rates.
Putting it all together, strategists expect a volatile first half to be followed by an easier second half, which could see stocks climb modestly higher.
Below is a roundup of 16 of these 2023 forecasts for the S&P 500, including highlights from the strategists’ commentary. The targets range from 3,675 to 4,500. The S&P closed on Friday at 4,071, which implies returns between -9.7% and +10.5%.
Barclays: 3,675, $210 EPS (as of Nov. 21, 2022) “We acknowledge some upside risks to our scenario analysis given post-peak inflation, strong consumer balance sheets and a resilient labor market. However, current multiples are baking in a sharp moderation in inflation and ultimately a soft landing, which we continue to believe is a low probability event.“
Societe Generale: 3,800 (as of Nov. 30) “Bearish but not as bearish as 2022 as the returns profile should be much better in 2023 as Fed hiking nears an end for this cycle. Our ‘hard soft-landing’ scenario sees EPS growth rebounding to 0% in 2023. We expect the index to trade in a wide range as we see negative profit growth in 1H23, a Fed pivot in June 2023, China re-opening in 3Q23 and a US recession in 1Q24.”
Capital Economics: 3,800 (as of Oct. 28) “We expect global economic growth to disappoint and the world to slip into a recession, resulting in more pain for global equities and corporate bonds. But we don’t anticipate a particularly prolonged downturn from here: by mid-2023 or so the worst may be behind us and risky assets could, in our view, start to rally again on a more sustained basis.“
Morgan Stanley: 3,900, $195 EPS (as of Nov. 14) “This leaves us 16% below consensus on '23 EPS in our base case and down 11% from a year-over-year growth standpoint. 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.“
UBS: 3,900, $198 EPS (as of Nov. 8) “With UBS economists forecasting a US recession for Q2-Q4 2023, the setup for 2023 is essentially a race between easing inflation and financial conditions versus the coming hit to growth+earnings. History shows that growth and earnings continue to deteriorate into market troughs before financial conditions ease materially.“
Citi: 3,900, $215 EPS (as of Nov. 18) “ Implicit in our view is that multiples tend to expand coming out of recessions as EPS in the denominator continues to fall while the market begins pricing in recovery on the other side. Part of this multiple expansion, however, has a rates connection. The monetary policy impulse to lower rates lifts multiples as the economy works its way out of the depths of recession.“
BofA: 4,000, $200 EPS (as of Nov. 28) “But there is a lot of variability here. Our bull case, 4600, is based on our Sell Side Indicator being as close to a ‘Buy’ signal as it was in prior market bottoms - Wall Street is bearish, which is bullish. Our bear case from stressing our signals yields 3000.“
Goldman Sachs: 4,000, $224 EPS (as of Nov. 21) “The performance of US stocks in 2022 was all about a painful valuation de-rating but the equity 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 Oct. 4) “…we think valuation headwinds will persist well into 2023, and most downside in the coming months will come from slowing profitability.“
Credit Suisse: 4,050, $230 EPS (as of Oct. 3) “2023: A Year of Weak, Non-Recessionary Growth and Falling Inflation”
RBC: 4,100, $199 EPS (as of Nov. 30) “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.“
JPMorgan: 4,200, $205 (as of Dec. 1) “…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.“
Jefferies: 4,200 (as of Nov. 11) “In 2023, we expect bond markets will be probing for the Fed’s terminal rate while equity markets will be in ‘no man’s land’ with earnings still falling as growth and margins disappoint.“
BMO: 4,300, $220 EPS (as of Nov. 30) “We still expect a December S&P 500 rally even if stocks do not hit our 4,300 2022 year-end target. Unfortunately, we believe it will be difficult for stocks to finish 2023 much higher than current and anticipated levels given the ongoing tug of war between Fed messaging and market expectations.“
Wells Fargo: 4,300 to 4,500 (as of Aug. 30) “ Our single and consistent message since early 2022 has been to play defense in portfolios, which practically means making patience and quality the daily watchwords. Holding tightly to those words implies that long-term investors, in particular, can use patience to turn time potentially to an advantage. As we await an eventual economic recovery, the long-term investor can use available cash to add incrementally and in a disciplined way to the portfolio.”
Deutsche Bank: 4,500, $195 EPS (as of Nov. 28) “Equity markets are projected to move higher in the near term, plunge as the US recession hits and then recover fairly quickly. We see the S&P 500 at 4500 in the first half, down more than 25% in Q3, and back to 4500 by year end 2023.“
The range of forecasts is pretty wide, and so different surveys are yielding 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’s not yet updated with 2023 targets.)
🙋🏻♂️ I’ll say two things about one-year price targets.
First, most of the equity strategists TKer follows produce incredibly rigorous, high-quality research that reflects a deep understanding of what drives markets. The most valuable things these pros have to offer have little to do with one-year targets. (And in my years of interacting with many of these folks, at least a few of them don’t care for the exercise of publishing one-year targets. They do it because it’s popular with clients.) Don’t dismiss their work just because their one-year target is off the mark.
Second, don’t obsess over these one-year targets if you don’t have to. Here’s what I wrote last December:
⚠️ It’s incredibly 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 are also the totally unpredictable developments that occur along the way.
Strategists will often revise their targets as new information comes in. In fact, some of the numbers you see above represent revisions from prior forecasts.
For most of y’all, it’s probably ill-advised to overhaul your entire investment strategy based on a one-year stock market forecast.
Nevertheless, it can be fun to follow these targets. It helps you get a sense of the various Wall Street firm’s level of bullishness or bearishness.
Good luck in 2023!
For last year’s forecasts, read: “Wall Street's 2022 outlook for stocks 🔭.“
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Reviewing the macro crosscurrents 🔀
There were a few notable data points from last week to consider:
🚨 There’s a lot of work to do on inflation. In a talk on Wednesday, Fed Chair Jerome Powell reiterated the central bank’s commitment to fight inflation by tightening monetary policy. From his prepared remarks: “…inflation remains far too high. My colleagues and I are acutely aware that high inflation is imposing significant hardship, straining budgets and shrinking what paychecks will buy. This is especially painful for those least able to meet the higher costs of essentials like food, housing, and transportation. Price stability is the responsibility of the Federal Reserve and serves as the bedrock of our economy. Without price stability, the economy does not work for anyone. In particular, without price stability, we will not achieve a sustained period of strong labor market conditions that benefit all.“
Powell acknowledged that the effects of tight monetary policy come on lag. He also acknowledged he was aware that the market prices for homes and rentals emerge in government inflation reports on a lag. From his remarks: “Housing inflation tends to lag other prices around inflation turning points, however, because of the slow rate at which the stock of rental leases turns over. The market rate on new leases is a timelier indicator of where overall housing inflation will go over the next year or so. Measures of 12-month inflation in new leases rose to nearly 20 percent during the pandemic but have been falling sharply since about midyear.“ For more how housing inflation can be confusing, read this.
Powell said the “ultimate level of rates will need to be somewhat higher“ than the Fed had forecast in September. But he also said the central may ease up on the pace of rate hikes. From the remarks: “Monetary policy affects the economy and inflation with uncertain lags, and the full effects of our rapid tightening so far are yet to be felt. Thus, it makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down. The time for moderating the pace of rate increases may come as soon as the December meeting.“
🎈 Inflation remains high. According to BEA data released Thursday, the core PCE price index — the Fed’s preferred measure of inflation — was up 5.0% in October from a year ago. This is down from the 5.2% rate in September but well above the Fed’s 2% target rate.
💪 Employers continue to add a lot of jobs. According to BLS data released Friday, U.S. employers added 263,000 jobs in November, stronger than the 200,000 gain economists expected.
💰 Wage growth is hot. Average hourly earnings in October jumped 0.6% month-over-month, much higher than the 0.3% rate expected. On a year-over-year basis, average hourly earnings were up 5.1%, which was hotter than the 4.6% expected.
📈 Job switchers get better pay. According to ADP, which tracks private payrolls and employs a different methodology than the BLS, annual pay growth for people who changed jobs was up 15.1% from a year ago. For those who stayed at their job, pay growth was 7.6%.
💸 CEOs are getting paid. Gallagher's Executive Compensation Consulting service published the findings of its 2021 pay study. From the report: “CEO pay grew at a surprising 28.2% and 17.7% for the overall Russell 3000 and S&P 500 indices. This contrast rates of 3.0% and -4.1% for 2020, compared with 2.0% and -1.6% for 2019.”
👍 There are lots of job openings. According to BLS data released Wednesday, U.S. employers had 10.33 million job openings listed in October, down modestly from the 10.69 million openings reported in September. While openings remain below the record high of 11.85 million in March, they remain well above pre-pandemic levels. If you’re wondering about the reliability of this metric, read this.
👍 Layoff activity remains low. According to BLS data, there were 1.39 million layoffs in September. While there’s no question this represents a lot of people going through a challenging time, this figure reflects just 0.9% of the number of people employed during the period. While some of this may be explained by labor hoarding (read more on this here), the elevated level of job openings suggests companies are looking to add workers, not lay them off.
😑 Consumer confidence slips. From The Conference Board: “Consumer confidence declined again in November, most likely prompted by the recent rise in gas prices… Inflation expectations increased to their highest level since July, with both gas and food prices as the main culprits. Intentions to purchase homes, automobiles, and big-ticket appliances all cooled. The combination of inflation and interest rate hikes will continue to pose challenges to confidence and economic growth into early 2023.“
🛍️ Personal spending is up. According to BEA data released Thursday, personal consumption expenditures increased by 0.8% in October.
💰 Consumers still have excess savings. From Wells Fargo: “The safety net of excess savings that consumers accumulated over the course of the pandemic has enabled the current resiliency; but critically, that net is getting smaller. We estimate households still have just over $1 trillion in accumulated savings through October, which is equivalent to about 6% of annual consumer spending. That translates to less than a year's worth of excess capital remaining, as it would take households another 11 months to completely deplete this stockpile if they continued to draw it down at the $97 billion average monthly pace they have over the past six months.“
🏘️ Home prices fall across the country. According to the S&P CoreLogic Case-Shiller index, home prices fell for a third consecutive month, declining 1.0% month-over-month in September. From S&P DJI’s Craig Lazzara: “As the Federal Reserve continues to move interest rates higher, mortgage financing continues to be more expensive and housing becomes less affordable. Given the continuing prospects for a challenging macroeconomic environment, home prices may well continue to weaken.“
Prices fell in all 20 metropolitan areas covered by the report.
📉 Rents are down. From Apartment List: “We estimate that the national median rent fell by 1 percent month-over-month in November. This is the third consecutive monthly decline, and the second straight month in which our index has broken the record for the largest monthly decline in its history, which starts in January 2017.”
🛢️ Oil prices are back to pre-war levels. From Axios: “Six months back, the world seemed at risk of running dangerously short of oil and gas, due to Russia's attack on Ukraine. Now, oil prices are back to pre-war levels and prices at the pump are falling.“
📈 Black Friday record. According to Adobe Analytics (via NPR), online shoppers spent a record amount on Black Friday.
📈 Cyber Monday record. According to Adobe Analytics (via TechCrunch), online shoppers spent a record amount on Cyber Monday.
📉 Manufacturing activity contracts. The Institute of Supply Management Manufacturing PMI fell to 49 in November, the first reading below 50 since May 2020. Any reading below 50 signals a contraction in activity in the sector.
This has come with lower prices.
📈 Corporate profit margins are still high. From Bloomberg: “After-tax profits as a share of gross value added for non-financial corporations, a measure of aggregate profit margins, shrank in the third quarter to 14.9% from 16.2% in the second quarter.“
Putting it all together 🤔
Inflation is cooling from peak levels. Nevertheless, inflation remains hot and must cool by a lot more before anyone is comfortable with price levels. So we should expect the Federal Reserve to continue to tighten monetary policy, which means tighter financial conditions (e.g. higher interest rates and tighter lending standards). All of this means the market beatings will continue and the risk the economy sinks into a recession will intensify.
But it’s important to remember that while recession risks are rising, consumers are coming from a very strong position. Many still have excess savings to tap into and the labor market continues to be very favorable for workers. Indeed, strong spending data confirms this financial resilience. So it’s too early to sound the alarm from a consumption perspective.
At this point, any downturn won’t turn into economic calamity given that the financial health of consumers and businesses remains very strong.
As always, long-term investors should remember that recessions and bear markets are just part of the deal when you enter the stock market with the aim of generating long-term returns. While markets have had a terrible year so far, the long-run outlook for stocks remains positive.
For more, check out the previous TKer macro crosscurrents »
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Since 1928, the S&P 500 generated a positive total return more than 89% of the time over all five-year periods. Those are pretty good odds. When you extend the timeframe to 20 years, you’ll see that there’s never been a period where the S&P 500 didn’t generate a positive return. It’s all a reminder that in the stock market, the long game is undefeated and that time is a valuable edge.