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The recent predictions from Barclays and Goldman Sachs have investors immediately questioning their strategies next year (read before you act)

By Sam Instone - December 06, 2022

It’s the most... wonderful time... of the year...

When Wall Street’s top strategists tell us where they see the stock market heading.

And it's unusually skeptical about 2023. Typically, the average forecast says the S&P 500 will climb by about 10%.

This is in line with historical averages.

But this year's different. 

The 'experts' are unusually cautious, with most expecting the S&P to end 2023 lower than where it is today (3,998.84 at the time of writing).

There’s hundreds of pages of research and analysis that come with these forecasts.

But, in summary:

  • Most Wall Street firms expect the U.S. economy to go into recession some time next year.
  • Many believe forecasts for 2023 earnings have more room to decline, which could mean lots of volatility for stocks in the early part of next year.
  • Many expect a drop in inflation and at least some strategists think if economic conditions deteriorate significantly, the Fed may even return to cutting interest rates.

So, generally speaking, a volatile first half to be followed by an easier second half (perhaps resulting in stocks climbing higher).

Below are 5 of these 2023 forecasts for the S&P 500, including highlights from the strategists’ commentary.

They make for interesting reading, but try to take them as nothing more than that. 

You and I know that no one knows what will happen next year...

The targets range from 3,675 to 4,500.

The S&P closed on Friday at 4,071, which implies returns between -9.7% and +10.5%.

  • Barclays: 3,675 (as of Nov. 21, 2022) “We acknowledge some upside risks to our scenario analysis given post-peak inflation, strong consumer balance sheets and a resilient labor market. However, current multiples are baking in a sharp moderation in inflation and ultimately a soft landing, which we continue to believe is a low probability event.“
  • Morgan Stanley: 3,900 (as of Nov. 14) “This leaves us 16% below consensus on '23 EPS in our base case and down 11% from a year-over-year growth standpoint. After what's left of this current tactical rally, we see the S&P 500 discounting the '23 earnings risk sometime in Q123 via a ~3,000-3,300 price trough. We think this occurs in advance of the eventual trough in EPS, which is typical for earnings recessions.“
  • UBS: 3,900 (as of Nov. 8) “With UBS economists forecasting a US recession for Q2-Q4 2023, the setup for 2023 is essentially a race between easing inflation and financial conditions versus the coming hit to growth+earnings. History shows that growth and earnings continue to deteriorate into market troughs before financial conditions ease materially.“
  • Citi: 3,900 (as of Nov. 18) “Implicit in our view is that multiples tend to expand coming out of recessions as EPS in the denominator continues to fall while the market begins pricing in recovery on the other side. Part of this multiple expansion, however, has a rates connection. The monetary policy impulse to lower rates lifts multiples as the economy works its way out of the depths of recession.“
  • Goldman Sachs: 4,000 (as of Nov. 21) “The performance of US stocks in 2022 was all about a painful valuation de-rating but the equity story for 2023 will be about the lack of EPS growth. Zero earnings growth will match zero appreciation in the S&P 500.“

There are more I could have included. 

The range of forecasts is pretty wide this year.

Different surveys are yielding very different results.

Bloomberg surveyed 17 strategists who had an average forecast of 4,009.

Reuters’ poll of 41 strategists revealed a median forecast of 4,200. 

My thoughts?

Don’t obsess over these one-year targets.

In fact, it’s best to ignore the markets.

Professional traders analyse the markets.

They ask, “Is it a good time to buy, or should we wait for a better time?”

They use quantitative analysis.

They look at trends.

They chase economic news like a cat on a laser pointer.

But peer-reviewed research says that’s a waste of time.

It's incredibly difficult to predict with any accuracy where the stock market will be in a year.

Apart from the countless number of variables at play, there are also the totally unpredictable developments that occur along the way.

In fact, strategists will often revise their targets as new information comes in. 

For most investors, it’s probably wrong to overhaul your entire investment strategy based on a one-year stock market forecast.

Following these targets is fun (and mildly entertaining).

It helps you get a sense of Wall Street’s level of bullishness or bearishness.

Nothing more. 

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