Why Earnings May Be The Biggest Risk To Stock Prices In 2023

While most investors are focused on Tuesday's CPI inflation report and Wednesday's Federal Reserve interest rate decision, Wall Street analysts say earnings growth, or lack thereof, may be the biggest risk to the SPDR S&P 500 ETF Trust SPY in 2023.

Earnings Pressures: New notes from analysts at Morgan Stanley and Goldman Sachs suggest S&P 500 earnings may contract more than the market is expecting in 2023, which could push the S&P 500 to new multi-year lows.

Related Link: Critical CPI Inflation Reading Coming On Tuesday: What Investors Should Expect

The Fed is expected to raise interest rates by 0.5% on Wednesday and continue raising rates in its ongoing battle against inflation. Rates will likely enter 2023 at their highest levels since 2007, while Tuesday's CPI reading is likely to show inflation is still nowhere near the Fed's long-term target of 2%.

S&P 500 Projections: The S&P 500 is already on track for its worst year since 2008, down 17.4% year-to-date.

Goldman now projects the S&P 500 will finish 2023 at around 4,000, while Morgan Stanley has a year-end target of 3,900. Those projections suggest stock prices could remain mostly flat from the S&P 500's current level of around 3,958 over the next 12-plus months.

Related Link: S&P 500 Loses Ground This Week Ahead Of Fed Interest Rate Decision: What Investors Need To Know

As a whole, analysts are expecting 5.5% S&P 500 earnings growth in 2023. However, those estimates have been falling rather sharply in the second half of the year. Analysts were expecting 2023 earnings growth of 9.6% as recently as June 30.

In the near-term, analysts are anticipating S&P 500 companies to report a 2.5% year-over-year drop in earnings in the fourth quarter, according to FactSet. Wall Street analysts also have an average 12-month forward target of 4,493 for the S&P 500, suggesting 24.8% upside.

Benzinga's Take: It's hard to see a path to nearly 25% upside if interest rates continue to rise and S&P 500 earnings grow just 5.5% next year. Investors should expect S&P 500 year-end price targets to continue to fall along with earnings growth estimates unless fourth-quarter earnings numbers come in better than expected.

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