10 Stock Market Predictions for 2023

2. Pressure on Earnings

Cameron Dawson, chief investment officer of NewEdge Wealth, also suggested the stock market could revisit its 2022 lows early next year.

“We think that a retest of the October low is very much in play. It doesn’t have to come before the end of the year,” she said this week on CNBC.

“As we look into that first quarter we think that because of that downward pressure on valuations from higher interest rates, and because of the downward pressure on earnings because of lower growth, it really does support a market moving lower from here,” said Dawson.

Looking into 2023, her firm sees see falling inflation as a potential headwind to profit margins because it could lower topline revenue growth.

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3. Potential Bull Market

RBC Wealth Management sees the potential for a new U.S. bull market cycle even if the economy enters recession in 2023, and says U.S. equity market gains could persist into the new year.

History indicates the equity market would likely launch a new bull market before the recession ends, according to the firm’s outlook report released earlier this month.

Moderating inflation data and the S&P 500’s tendency to deliver strong returns for months after midterm elections could help produce a rally in equity prices in the coming weeks or months, RBC predicted.

"Despite the lingering and anticipated economic challenges, the equity market has already absorbed significant blows, including one of the Fed's fastest and biggest tightening cycles in history," said Kelly Bogdanova, RBC Wealth Management – U.S. vice president and portfolio analyst.

"It would also be rare for the S&P 500 to deliver back-to-back negative return years, and the corporate earnings outlook isn't as bad as in previous periods of economic stress."

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4. Sunnier Late in the Year

With corporate profits under pressure for the next few quarters, equity markets could slip in the near term but the outlook will likely improve later in 2023 and into 2024, UBS Wealth Management predicts.

UBS has “fairly high conviction that earnings will contract next year” and has “penciled in a 4% fall in S&P 500 EPS in 2023 to $215. This is well below bottom-up consensus expectations for EPS growth of 5% to $231 and suggests continued negative earnings revisions.”

Conditions surrounding the October market low weren’t typical for a bear market bottom, and “investors have to be prepared for another leg down in this bear market in the months ahead,” the firm says, adding that trends should improve in 2024.

The firm favors consumer staples, health care and energy; prefers global versus domestic cyclical stocks; and has downgraded financial to least preferred status.

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5. A Resilient Economy

Morgan Stanley resists the consensus view that earnings will collapse in early 2023, dragging down stocks, and suggests the first quarter “has the ingredients to build on strengths of the fourth quarter of 2022.”

Financial, industrial and material stocks all outperformed in October and November, the firm notes in its 2023 outlook. “If the economy were going to collapse in the first quarter of 2023, these economically cyclical groups would not be leading today,” Andrew Slimmon, Morgan Stanley applied equity advisors head, writes.

“The economy is proving too resilient, causing the ‘looming collapse’ in earnings to remain elusive for yet another quarter. I expect earnings to drip down slowly, frustrating market bears. With continuing improvements on the inflation front mixed in, you have the ingredients for a strong first quarter,” he says.

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6. More Choppiness?

Fidelity sees potential for a “sideways, volatile market in the coming year.”

Jurrien Timmer, global macro director at Fidelity Management & Research, writes that markets may continue to face choppiness in 2023 amid potentially declining earnings and interest rates that stay high for longer than expected.

“However, I believe it's most likely that the market won't experience a significant downtrend, or an uptrend, for the year,” he writes, adding that with interest rates higher than they were a year ago, bonds may provide better support to investors' portfolios in 2023.

“I don't, however, believe we are close to the start of a new bull market yet. The way I see it, there are at least a few waves, or risks, on the horizon that could rock investors' boats in the coming year.”

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7. Speed Bumps Ahead

BlackRock expects stocks to continue their “stutter-step motion” in early 2023 “after a downbeat and extremely volatile 2022.”

“Market ups and downs in the final months of the year reflected investors’ battle between ongoing fear and flashes of hope that the tough-talking Fed might be ready to ease its rate-hiking campaign,” the firm says in its first-quarter forecast.

“With inflation remaining elevated and the Fed intent on batting it down with higher interest rates, we see the equity bounces as bear market rallies rather than the start of a new bull trend ― for now. Such ‘speed bumps’ are not uncommon on the path to solid longer-term returns.”

While the market may remain volatile in the new year, BlackRock sees “some potential light at the end of the tunnel for stocks.” Inflation appears to have peaked, stocks generally climb after midterm elections, and valuations have reached an attractive starting point, the firm says,

As of Nov. 30, the S&P 500’s trailing 12-month price-to-earnings ratio reached 19.7, BlackRock notes. While stock prices could fall, the firm says, five-year returns since 1957 have averaged 65% when stock valuations started at 15-25.

The firm recommends a focus on resilience in equity portfolios, including stocks with quality characteristics and positions that seek to balance offsetting risks. That means value coupled with growth, and defensives alongside cyclicals.

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8. Improving Equity View

Vanguard expects the global economy will likely enter a recession in 2023 based on this year’s rapid monetary tightening to fight inflation, with job losses most concentrated in the technology and real estate sectors.

“Inflation has likely already peaked in most markets, but reducing price pressures tied to labor markets and wage growth will take longer. As such, central banks may reasonably achieve their 2% inflation targets only in 2024 or 2025,” the firm said in a recent economic and market outlook.

Central banks will continue their aggressive tightening cycle into early 2023 before pausing as inflation falls and job losses mount, and “we see most central banks reluctant to cut rates in 2023 given the need to cool wage growth,” Vanguard says.

The investment giant says its global equity outlook is improving long-term based on lower valuations and higher interest rates — its return expectations are 2.25 percentage points higher than last year’s — even though equity markets haven’t dropped materially below their fair-value range, as they typically do during recessions.

Vanguard projects higher 10-year annualized returns for non-U.S. developed markets (7.2%–9.2%) and emerging markets (7%–9%) than for U.S. markets (4.7%–6.7%).

In the U.S., Vanguard projects GDP growth around 0.25% over 2023 and estimates that given the pace of inflation relative to wages, the average household has experienced a $400 shortfall per month in its standard of living relative to before the pandemic.

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9. Investor Relief?

While the market repriced this year for the war in Ukraine, supply chain problems, high inflation and rising interest rates, investors may feel more optimistic in 2023 as long as conditions don’t deteriorate, “and we might begin to see better market performance,” Columbia Threadneedle Global CIO William Davies said earlier this fall.

Geopolitical risks remain, he said, noting the markets didn’t anticipate the Russian invasion “and it’s possible that a similar blind spot occurs heading into 2023.”

The CIO said it seems a recession in Europe is inevitable in 2023.

“In the U.S., we’ll have to watch the Fed and how much economic pain it deems necessary to beat inflation,” Davies said. “I don’t think that we’ll see a recession along the lines of what we saw in 2020 or 2008, but given the risk, focusing on quality will be essential for success — across asset classes and regions.”

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10. Tug of War

RBC Capital Markets’ year-end 2023 S&P 500 target of 4,100 is unchanged (about flat with recent levels), although the firm lowered its 2023 S&P 500 EPS forecast by roughly 4% to $199, Lori Calvasina, U.S. equity strategy head, noted on a Nov. 30 podcast.

“We continue to anticipate choppy conditions in U.S. equities over the next few quarters,” she added, noting the firm prefers U.S. equities over non-U.S. equities, value stocks over growth, and small-cap over large-cap companies.

As for the S&P 500, she said, “Our most optimistic test puts the index at 4,600 — our ‘bull case’ if our ‘base case’ of 4,100 is too conservative.” RBC’s S&P 500 EPS forecast includes expectations for sub-1% real GDP throughout 2023, a Consumer Price Index that falls to 3.1% at year-end 2023, a few Fed rate cuts in the second half, and the 10-year Treasury yield returning to 3.5%, she said.

“We continue to see stocks as caught in a tug of war between the bulls and the bears,” said Calvasina, noting the S&P 500 is typically down a month before final rate hikes, which the firm expects in March. On the other hand, the outlook for investor sentiment, moderating inflation and slightly lower interest rates suggest bullishness, she said.

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