• 2022 was a weak stock market year – will 2023 pick up again?
• Everything stands and falls with economic developments
• Experts anticipate a weak first half of the year followed by a rally
Every year experts diligently publish price forecasts for the coming stock market year. Of course, stock market experts don’t have crystal balls either, and their expectations are often wrong. Nevertheless, the forecasts paint an interesting picture of the mood and draw attention to developments to be expected – so it’s worth taking a closer look at the analyses.
2022: A difficult stock market year
Hardly any investor will remember the stock market year 2022 positively. Investors didn’t have it easy: regardless of whether you invested in gold, bonds, ETFs or individual stocks – in almost all asset classes, significant losses had to be coped with at times. Some segments of the market – such as energy commodities and stocks like Shell, and some consumer staples stocks like Pepsi – saw significant price gains, but few investors were able to completely avoid the broad sell-off in stocks and bonds.
It was a toxic mix that gripped the capital markets: the war in Ukraine that began on February 24, 2022 reduced the supply of energy as a result of Western sanctions against Russia. This fueled already high inflation, urging monetary authorities around the world to raise interest rates even more aggressively. China’s no-COVID lockdown in numerous port cities, such as Shanghai, was another major drag on the global economy and particularly on global supply chains. One result of the manifold crisis phenomena were tendencies towards recession, especially on the European continent. Investors hardly dared to come out of the cover and sent the vast majority of stock indices down by more than 20 percent in the meantime, many stock exchanges entered a bear market as a result.
2023: It can only get better – right?
Many questions accompany the turn of the year: Have we already seen the peak of inflation? Are interest rate hikes slowing down? When will the tightening cycle end? How severe will the global recession be – or will it not come at all? Rarely have the predictions of the experts been as uncertain as with the annual forecast for 2023. The Bank of America (BoA) takes the middle between the crash prophets and stock market optimists and expects that the S&P 500 will be at 4,000 points at the end of 2023, which is not implying too much change.
Bank of America base case: mild US recession
The forecast of 4,000 points at the end of the year represents the bank’s middle scenario and is linked to the expectation that earnings per share in the S&P 500 will fall by an average of 9 percent to $200. This would be equivalent to a comparatively mild recession. In the much more pessimistic “Bear Case Scenario”, the BoA considers a slide to 3,000 points to be possible. Overall, however, the BoA remains cautiously optimistic: “One of the reasons why we are more confident about earnings is the general strength of corporate and consumer balance sheets,” quoted “yahoo finance” the head of US equity strategy and quantitative strategy, Savita Subramanian. In 2022, the stock markets were all about the Fed, in 2023 it will be about the economy, according to Subramanian’s assessment.
Strong wage growth could reduce corporate profits
The BoA sees a major problem for the economy in the fact that wage growth will exceed companies’ ability to raise prices. Accordingly, only half of the companies in the S&P 500 will achieve real sales growth. The US employment market report published in December actually pointed to a significant increase in wage levels in the USA. “The best environment for equity investors is when pricing power is growing faster than wages while people are buying more,” Subramanian said. In contrast, 2023 could see “the worst environment for equity investors, as wages are rigid and high, prices are falling and demand is beginning to wane.” Against this background, a stock market upturn is unlikely to materialise.
Are Many Stocks Still Overvalued?
Interestingly, the BoA still tends to believe that US stock market heavyweights such as Apple, Microsoft and Amazon are overvalued – despite the significant sell-off of these tech giants in recent months. The traditional bank only considers the index to be fairly valued if the largest 50 of the 500 stocks are excluded from the calculation. In fact, the S&P 500’s 2023 price-to-earnings (P/E) ratio of 18 is still above the long-term average of 16, according to the Wall Street Journal.
“Wealth effect” further risk for stock market year 2023?
In addition to the macroeconomic difficulties and the partial overvaluation of the market, the BoA identifies another risk for the stock exchanges: the democratization of investing and the associated “wealth effect”. The wealth effect is a behavioral economics phenomenon that suggests consumers will spend more as the value of their wealth increases – this was clearly evident in 2020 and 2021. However, this trend is likely to reverse with the weakening stock markets: According to data from the BoA, around 22 trillion US dollars were lost on the financial markets in 2022, resulting in an estimated loss of 700 billion US dollars in consumer purchasing power. According to the BoA, the democratization of investments in recent years could intensify and widen the negative effects on the markets and the economy.
Reuters poll: Analysts expect positive market return for 2023
Analysts who were asked about their forecasts for 2023 as part of a survey by the Reuters news agency are somewhat more optimistic than the BoA. On average, they expect the S&P 500 to be at 4,200 points by the end of December 2023. The analysts are also quite optimistic for the industry-heavy Dow Jones, which includes fewer tech stocks: They see the traditional index at 36,500 points at the end of 2023. However, expectations have cooled down significantly in recent weeks: In late August, the strategists in another Reuters survey had still expected the S&P 500 to close at 4,700 points for the year. According to most of the experts surveyed, the crucial question for the development of the capital market is to what extent the already completed and future interest rate increases by the Fed, ECB & Co. will slow down the real economy. Should there actually be a noticeable recession in the global economy, the real return on the stock exchanges could be negative in 2023 as well as in 2022.
Crucial question: How do interest rates and inflation affect the real economy?
As early as the fourth quarter of 2022, analysts, based on Refinitiv IBES data, expect earnings in the US to fall for the first time in two years. The estimates are also declining for 2023, but they still assume an average increase in profits of 4.9 percent. The analysts therefore agree that the economic situation in the USA is characterized by a downward trend, although unemployment remains extremely low and consumer spending is at a high level overall. Terry Sandven, chief equity strategist at US Bank Wealth Management, is certain that the high interest burden and persistent inflation will have an impact on the demand situation in 2023. However, many crucial variables are still unclear: “Currently, given the economic uncertainty, ongoing inflationary pressures and the lack of transparency of consumer and corporate spending in 2023, corporate forecasts for 2023 are very uncertain,” says Sandven. Nevertheless, he himself expects the S&P 500 to rise slightly to 4,275 points.
Where will the DAX be at the end of 2023?
Forecasts are also being published happily for the leading domestic index. Most are characterized by a “purified optimism”, as capital market expert Robert Halver from Baader Bank described his own expectations. After the weak stock market year 2022, in which the DAX temporarily slipped from its record level of 16,285 points below the 12,000 point mark, 2023 should bring a little more calm, stock market observers hope. Inflation will at least fall slightly in Germany in 2023, and companies also appear to be in better shape than was feared, especially in September 2022. Helaba is particularly confident and expects the German stock market barometer to close at 16,000 points in 2023. The Landesbank Baden-Württemberg’s estimate of 15,500 points is in a similar range.
Weak first half of the year, recovery rally in the second half?
Many strategists assume that 2023 will be volatile. The first half of the year will continue to be characterized by a general weakness in the market, so the trend of the trembling stock exchanges from 2022 should continue for the time being. Corporate profits are likely to fall. When the Fed and many other central banks have declared the cycle of interest rate hikes to be over and the economic situation shows signs of improvement again, the stock markets will also be striving to rise again quickly – this is a common argument used by stock market experts. BoA expert Subramanian agrees: “It’s a two-half story. We think the market will have a rougher start to 2023 and then end the year in recovery mode.”
Bank of America: “Investing is a marathon, not a sprint”
But despite the short to medium-term signs of the crisis, the BoA experts remain optimistic about the capital markets in the long term and expect an average return of eight percent over the next ten years. “Equity investors should think long-term rather than focusing on short-term risks,” Subramanian said. Investing is not a sprint, but a marathon – any price setbacks can be coped with very well with a sufficiently long investment horizon of at least ten years and rather represent attractive follow-up purchase opportunities.
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