A sneak preview of Wall Street's 2023 stock market forecasts 🔭
Plus a review of the macro crosscurrents 🔀
Stocks surged 5.7% on Monday and Tuesday and then shed almost all of those gains on Wednesday, Thursday, and Friday. When it was all said and done, the S&P 500 closed at 3,639.66, up a modest 1.5% from its Sept. 30 close of 3,585.62, which was the lowest closing price of 2022. The index is now down 24.1% from its January 3 closing high of 4,796.56.
There’s a lot to be said about what’s moving markets. (You can begin to understand what’s going on by reading this and this.)
One thing is clear: None of Wall Street’s most prominent stock market strategists saw this year’s sell-off coming.
As of Dec. 5, 2021, 14 strategists followed by TKer had 2022 year-end S&P 500 targets ranging from 4,400 to 5,300. At the time, the implied one-year returns ranged from -3% to +17%.
It speaks to the difficulty of accurately predicting short-term returns in the market when some of the most experienced, well-resourced professionals are this far off.
With that in mind, a handful of strategists have already communicated to clients where they expect the S&P 500 to head in 2023. Here’s a roundup:
Capital Economics: 3,800 (as of 10/7/22)
Morgan Stanley: 3,900*, $219 EPS (as of 10/3/22) *This is a June 2023 target.
Citi: 3,900, $215 EPS (as of 10/3/22 via Investing.com)
HSBC: 4,000, $225 EPS (as of 10/4/22)
Goldman Sachs: 4,000, $234 EPS (as of 10/4/22)
Credit Suisse: 4,050, $230 EPS (as of 10/3/22)
UBS: 4,200, $235 EPS (as of 10/3/22)
Relative to Friday’s closing price, these targets imply returns of 4% to 15% by the end of 2023.
Generally speaking, the strategists expect little to no growth in earnings, on which they apply a P/E multiple in the mid to high teens. Most expect inflation to cool significantly, allowing the Federal Reserve ease up on its hawkish monetary policy stance.
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. 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.
Anyway, I look forward to publishing a more comprehensive list of 2023 forecasts later this year.
PS: For more on all this, my friend Eric Soda of the Spilled Coffee newsletter has a roundup of what some legendary investors had to say about short-term forecasting. Check it out here.
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Reviewing the macro crosscurrents 🔀
There were a few notable data points from last week to consider:
💼 Job gains continue. U.S. employers added a healthy 263,000 jobs in September, according to BLS data released Friday. Total employment as measured by payrolls stood at 153.018 million, which is above the pre-pandemic high of 152.504 million in February 2020.
🥶 … but job growth is decelerating. The 263k jobs added reflect the lowest monthly gain since April 2021, confirming that the labor market is cooling.
💸 Wages climb. Average hourly earnings climbed by 0.31% in September, up from 0.28% in August but down from 0.50% in July.
👍 Unemployment remains low. The unemployment rate fell to 3.5% in September from 3.7% in August. You have to go back to June 1969 to find a lower unemployment rate.
👍Unemployment claims remain low. Initial claims for unemployment benefits rose to 219,000 during the week ending Oct. 1, up from 190,000 the week prior. While the number is up from its six-decade low of 166,000 in March, it remains near levels seen during periods of economic expansion.
👍 Layoff activity remains low. According to BLS data released Tuesday, the layoff rate (i.e., layoffs as a percentage of total employment) ticked up ever so slightly to 1.0% in August from 0.9% in July.
📉 Job openings are falling. According to the same BLS report, U.S. employers had 10.05 million job openings listed in August. This is down from 11.17 million job openings in July, and the change represents the largest monthly drop since April 2020.
🤔 Immigrant labor is still depressed. From Bloomberg: “Immigration to the US is rebounding after a sharp two-year slowdown, but the pickup is unlikely to plug the pandemic-induced gap in new arrivals amid persistent employee shortages in industries reliant on foreigners.“
💸 Changing jobs gets you a bigger raise. However, this trend is cooling. From ADP: “Job changers, who have been notching double-digit, year-over-year gains since the summer of 2021, lost momentum in September. Their annual pay rose 15.7%, down from a revised 16.2% gain in August. It's the biggest deceleration in the three-year history of our data. For job stayers, annual pay rose 7.8% in September from a year ago, up from a revised 7.7% in August.“
🔨 Manufacturing activity cools. According to the ISM’s Manufacturing PMI, manufacturing activity grew in September but at a decelerating rate.
S&P Global’s Manufacturing PMI ticked up marginally in September. But the report notes that “even with the latest improvement, the weakness of the data in recent months still point to manufacturing acting as a drag on the economy in the third quarter...“
🤷🏻 Service sector surveys are mixed. According to the ISM’s Services PMI, service sector activity growth decelerated slightly in September. Nevertheless, the industry is growing at a healthy clip according to this survey.
S&P Global’s Services PMI, however, reflected contraction in the industry in September, though at a less severe rate than August.
💡 Manufacturing surveys confirm a tight labor market. From S&P Global: “…firms expanded their workforce numbers at the fastest pace since March, although labor shortages continued to hamper firms' ability to work through incoming new orders.“ From ISM’s Tim Fiore: “Markedly absent from panelists’ comments was any large-scale mentioning of layoffs; this indicates companies are confident of near-term demand, so primary goals are managing medium-term head counts and supply chain inventories.“
💡 Services surveys also confirm a tight labor market. From S&P Global’s Chris Williamson: “With companies also reporting staffing issues and rising wages due to very tight labor market conditions, persistent inflation remains a concern at the same time that the economy appears to be struggling to regain momentum.” From ISM’s Anthony Nieves: “Employment continued to improve despite the restricted labor market.“
⛓ Supply chains improve. The New York Fed’s Global Supply Chain Pressure Index— a composite of various supply chain indicators — fell for the fifth consecutive month in September to its lowest level since November 2020, meaning supply chains are easing.
📈 Inventory levels are up. Wholesale inventories jumped 1.3% in August, bringing the inventory/sales ratio to 1.31.
🚗 Used car prices are down. From Manheim Consulting: “Wholesale used-vehicle prices (on a mix, mileage, and seasonally adjusted basis) decreased 3.0% in September from August. The Manheim Used Vehicle Value Index declined to 204.5 and is now down 0.1% from a year ago.“
📈 Mortgage rates are high. According to Freddie Mac, the average 20-year fixed rate mortgage is 6.66%.
🏚 Mortgage payments are high. According to Bloomberg’s Michael McDonough, a $1,000 monthly payment on a 30-year mortgage with a 5% down payment gets you just $160k worth of house.
🏠 Home seller are cutting prices. From Redfin: “On average, 7.7% of homes for sale each week had a price drop, a record high, up from 3.9% a year earlier.“
🏘 The supply of homes for sale is up. From Redfin: “Months of supply—a measure of the balance between supply and demand, calculated by dividing the number of active listings by closed sales—increased to 3.0 months, the highest level since July 2020.“
🍼 People are planning to have kids. From BofA: “The percentage of respondents expecting a New Baby over the next 12-months remains near all-time highs both sequentially and y/y (Exhibit 1). We continue to watch for a Millennial Baby Boom as pregnancy test unit sales also remain elevated...”
Putting it all together 🤔
Supply chains continue to ease and inventory levels continue to rise. While some of this can be attributable to the economy cooling, the bottom line is that these are positive developments for bringing down inflation.
Job growth is cooling and job openings are falling, something the Federal Reserve has been hoping for in its effort to get inflation under control by cooling wage growth. Still, the labor market is also quite robust as the unemployment rate and layoff rate are near record lows — another thing the Fed has been hoping for in its effort to cool the labor market without causing too many people to lose their jobs.
While there are many signs that prices in the economy are easing, aggregate measures of inflation remain very high.
So prepare for things to cool further given that the Fed is clearly resolute in its fight to get inflation under control. Recession risks will continue to intensify and analysts will continue trimming their forecasts for earnings. For now, all of this makes for a conundrum for the stock market and the economy until we get “compelling evidence” that inflation is indeed under control.
The good news is there’s still a strong case to be made that any downturn won’t turn into economic calamity. Furthermore, the long-run outlook for stocks continues to be positive.
For more, check out last week’s TKer macro crosscurrents »
Best of TKer 📈
Here’s a roundup of some of TKer’s most talked-about paid and free newsletters. All of the headlines are hyperlinked to the archived pieces.
The market beatings will continue until inflation improves 🥊
While the stock market is likely to generate healthy returns in the long run, there’s good reason for investors to manage expectations in the short run as the Federal Reserve gets increasingly aggressive with monetary policy.
In the stock market, time pays ⏳
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.
Your guide to 'good news is bad news' and 'bad news is good news' 🙃
The Fed is actively trying to slow the economy — even if it means “some pain” for businesses and consumers — because it believes that is the prescription for getting inflation under control. In this world, good news about the economy is potentially bad news if it’s exacerbating the dislocation between supply and demand. Let’s review a few hypothetical headlines and examine why good news might be bad news — and vice versa.
Why the recession we may or may not be heading for won't be that bad 💪
While the economy may not be in a recession now, it’s certainly slowing and is at risk of going into a recession. However, not every recession has to be an outright economic debacle like the global financial crisis or the Great Depression. Yes, unemployment would likely rise during the next recession, which would be unquestionably painful for those affected. But the losses could be limited and the duration of the economic contraction could be relatively short.
Consumers have an extra $2.5 trillion. But in some ways, it's an economic curse.💰
Let’s talk about excess savings, the roughly $2.5 trillion financial war chest that represents a massive tailwind for the economy. This has generally been good news, especially for investors in companies that have successfully passed higher costs onto customers in the form of higher prices. However, these savings are also exacerbating two of the biggest challenges in the economy.
The complicated mess of the markets and economy, explained 🧩
Economic growth has since been awesome, powered by tons of job growth. GDP, personal consumption, and home prices roared to record levels as the unemployment rate tumbled. One problem: Inflation. Why? Supply hasn’t been able to keep up with booming demand, a dynamic that’s been fanning the flames of inflation.
700+ reasons why S&P 500 index investing isn't very 'passive'💡
Passive investing is a concept usually associated with buying and holding a fund that tracks an index. And no passive investment strategy has attracted as much attention as buying an S&P 500 index fund. However, the S&P 500 — an index of 500 of the largest U.S. companies — is anything but a static set of 500 stocks. From January 1995 through April 2022, 728 tickers have been added to the S&P 500, while 724 have been removed.
You can make any piece of data look bad if you try 🔄
There’s more than one way to frame a piece of economic or financial market data. It might be better than expected relative to economists’ expectations, but it could also be worse than expected relative to traders’ expectations. That same stat could be down on a month over month basis and also up on a year over year basis. It may be high relative to the 10-year average but low relative to the 5-year average. It may look bad on an absolute basis but it may look good relative to what may be the normal course of business. With that in mind, below are nine unsettling — albeit accurate — market observations that miss the point when you take a look at the big picture.
Here’s some info on how the index is constructed, according to the NY Fed: “We use the following subcomponents of the country-specific manufacturing PMIs: ‘delivery time,’ which captures the extent to which supply chain delays in the economy impact producers—a variable that may be viewed as identifying a purely supply-side constraint; ‘backlogs,’ which quantifies the volume of orders that firms have received but have yet to either start working on or complete; and, finally, ‘purchased stocks,’ which measures the extent of inventory accumulation by firms in the economy. Note that in case of the U.S., the PMI data start only in 2007, so for the U.S. we combine the PMI data with those from the manufacturing survey of the Institute for Supply Management (ISM).“