Wharton Professor Jimmy Siegel Says Real Inflationary Challenges Over, Predicts 15-20% Rally For US Stocks In First Half Of 2023

As a dismal year on multiple fronts draws to a close, the attention has shifted to what’s in store for the financial markets in 2023.

What Happened: The year 2023 is likely to be a very good one for equities, promising roughly 15-20% upside, Wharton Professor Jeremy Siegel said in his weekly commentary. As opposed to the widespread belief that the gains could come in the second half of the year, Siegel sees this happening in the first half itself.

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Even if there is a mild recession, the earnings outlook can remain more robust than feared, the professor said. The view is predicated on his expectations that productivity trends will improve after a dreadful year, which, in turn, can support more robust corporate profit margins.

A long-run fair market multiple is around 20 times earnings and factors such as lower real interest rates and declining transaction costs to get diversified exposure to the market can support a higher multiple, Siegel said.

While comparing returns between stocks and bonds, the real returns of bonds should be used and not the nominal return, he said. The real 10-year bond yield is currently at 1.4% as opposed to the nominal yield of 3.7% and this is only going to go lower in 2023, he added.

Inflation Is Slowing: Siegel pointed to recent data points that underlined the cooling off of inflationary pressure. The one-year inflation outlook of the University of Michigan’s consumer sentiment report for December declined to the lowest level in 18 months. Additionally, the personal consumption expenditure deflator came in benign in November.

Siegel maintained his view that real inflationary challenges are over, particularly if the Fed begins to factor in real-time indicators for housing data.

Fed Rate Outlook: Siegel expects the fed fund rate to drop to 2-3% by the end of 2023 and the 10-year interest rate to be 50-100 basis points below where it is currently.

The elevated wage pressure, according to the analyst, is the result of a structural shift down in labor supply and the Fed can’t do much about this.

The SPDR S&P 500 ETF Trust SPY, which has lost 19.4% this year, settled Wednesday's session down 1.24% at $376.66, according to Benzinga Pro data. The SPY is an exchange-traded fund that tracks the performance of the broader S&P 500 Index.

Some of the heavily-weighted stocks of the S&P 500 Index such as Apple Inc. AAPL, Microsoft Corp. MSFT and Amazon Inc. AMZN have fallen steeply for the year-to-date period in a broader tech rout.

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