Are S&P 500 Stocks Poised To Bounce Big In 2023? Here's What Analysts Think

After a disappointing year, expectations are that it can’t get any worse for the financial markets. Analysts have been cautious this time around after much of their 2022 forecasts fell flat in the wake of the unprecedented headwinds that rocked the economy and the market.

The Year That Was For Equity Market: The equity market peaked very early in 2022, with most stocks hitting their 52-week highs in January. Thereafter, it was the case of a broader downtrend interspersed by bear-market rallies. Even the technical Santa Claus rally that many had hoped eluded Wall Street.

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The S&P 500 Index, considered a measure of broader market performance, ended the year down 19.44%, reversing much of the 27% advance in 2021. The year marked the worst bear market since 2008 when a recession hit in the aftermath of a housing market collapse, which later morphed into a financial crisis.

The tech sector led the sell-off from the front, as evidenced by the steeper 33.1% plunge by the Nasdaq Composite Index. The Invesco QQQ Trust QQQ, an exchange-traded fund that tracks non-financial tech companies, shed 32.6%.

Mega-cap tech stocks — ones having market-cap in excess of $200 billion, which are often feted as high-quality, all-weather stocks — chalked up massive losses. Tesla Inc. TSLA, Meta Platforms Inc. META, Nvidia Corp. NVDA and Amazon Inc. AMZN saw over 50% of their market valuation erode in 2022.

Outlook Remains Muted: Uncertainty concerning the Fed rate trajectory and the economic and inflation outlook that weighed down on the equity market for much of 2022 hasn’t been resolved yet.

Morgan Stanley analyst Andrew Slimmon, however, sounded upbeat. “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,” he said.

This along with continuing improvements on the inflation front could lead to a strong first-quarter performance, Slimmon added.

Credit Suisse, meanwhile, sees 2023 as a tale of two halves. As the market’s focus remains on the “higher rates for longer” theme, equity market performance is expected to remain muted, the firm said. Against the backdrop, the firm expects sectors and regions with stable earnings, low leverage and pricing power to fare better.

“Once we get closer to a pivot by central banks away from tight monetary policy, we would rotate toward interest-rate sensitive sectors with a growth tilt,” Morgan Stanley said.

The visibility into the market’s trajectory is still clouded. Here’s a compilation of the year-end 2023 S&P 500 price target by some Wall Street firms:

JPMorgan: 4,200
Fundstrat: 4,750
Oppenheimer: 4,400
Morgan Stanley: 3,900
Wells Fargo: 4,200
Evercore ISI: 4,150
UBS: 3,900
Cantor Fitzgerald: 4,100
BofA: 4,000
RBC Capital Markets: 4,000
Jefferies: 4,200
Deutsche Bank Securities: 4,500
BMO Capital Markets: 4,300
Goldman Sachs: 4,000
BNP Paribas: 3,400

The year-end targets range between 3,400 and 4,750, which suggests a move of a negative 11.5% to a positive 23.7%.

Fundstrat’s Thomas Lee, who has the most optimistic forecast, reasoned that the 2022 crisis is now shifted to opportunities, creating the highest probabilities of over 10% returns since 2020. Inflation is falling like a rock and the Fed framework will very likely change sharply in 2023, leading to fewer hikes in 2023 and a lower terminal rate, he said.

The earnings growth is the wild card here. Goldman Sachs U.S. Equity Strategist David Kostin said, “Zero earnings growth will drive zero appreciation in the stock market.” The firm expects S&P 500 earnings to show no growth in 2023 after declining by about 17% in 2022. Revenue of the companies that are part of the index will likely rise 4%, in line with nominal GDP growth, but margins will likely shrink, eliminating growth in earnings per share, it added.

HSBC, meanwhile, said it is Overweight on U.S. equities, premised on its expectations that the country will avert an outright recession.

Benzinga’s Take: Corporate earnings could be lackluster at least in the first half of 2023, given the dollar strength and fears of a hard landing. Consumers, who fuel the bulk of the economic activity, could turn circumspect amid lingering recession fears, exerting further downward pressure.

Inflation, though have shown a let-up, has to demonstrate a sustainable downtrend for the Fed to relent, given its obsession with bringing down pricing pressure. With so many variables involved in turning things around, the market outlook remains highly uncertain. The only certain positive catalyst is the depressed valuation of stocks following their dismal performance in 2022.

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