Wall Street's 2023 outlook for stocks 🔭

Plus a review of the macro crosscurrents 🔀

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

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.)

According to Bloomberg, the average forecast called for a decline, which is very unusual. (Source: Bloomberg)

🙋🏻‍♂️ 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 firms’ 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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More from TKer:

• A few charts to remember before you jump to conclusions 📊

• Remember these squiggly lines when analysts talk about earnings forecasts 〰

• Stocks usually bottom before everything else

• Stanley Druckenmiller's No. 1 piece of advice for novice investors 🧐

• What just happened won't tell you what's coming next 🧮

• There's more upside than downside for long-term investors 📈

• 10 truths about the stock market 📈

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Reviewing the macro crosscurrents 🔀

There were a few notable data points from last week to consider: