Inflation rates have cooled, but it is unclear how much further they will fall. Meanwhile, the bond market is predicting a recession, while GDP has been strong in the third and fourth quarters of 2022. Here are ten predictions for the stock market in 2023:
Inflation Will Decrease
The inflation swaps market is predicting that the CPI will decrease in 2023, reaching a rate of 2.5% by the middle of the year. However, other measures suggest that inflation may be sticky and remain at higher levels than the market anticipates. It is more likely that CPI will remain in the 4 to 6% range in 2023 and not decline as quickly as expected.
A Stagflationary Environment
A sticky inflation rate in the 4 to 6% range could lead to a slowdown in nominal GDP growth, resulting in a stagflationary environment with near 0% real growth.
No Earnings Recession
As companies generate sales and earnings in nominal terms, earnings estimates for the S&P 500 will not decline as significantly as some expect. Companies will be able to manage margins well enough to keep earnings at 2022 levels, resulting in no earnings recession and around $220 in earnings for the S&P 500, compared to the 7% growth rate estimates at the end of 2022.
Key Rates to Rise Above 6%
With inflation stuck in the 4 to 6% range and the economy holding steady, the Fed will be forced to raise rates above the 5.1% level indicated at the December FOMC meeting, potentially reaching overnight rates above 6%.
2-Year Yields to Increase
Sticky inflation and a more aggressive Fed will lead to the United States 2-Year rate increasing to around 5.25%.
2-Year Will Influence 10-Year Yields
A rising US 2-year will pull the 10-Year rate higher, resulting in an inverted yield curve around -50 bps, with the 10-year rate rising to around 4.75%.
U.S. Dollar to Remain Stagnant
While rates in the US are likely to rise, rates in Europe and Japan are also expected to increase. This will result in the dollar index remaining stagnant, with the dollar trading between 101 and 115.
Bitcoin Prices to Decrease
Higher interest rates and tighter financial conditions will impact bitcoin negatively, causing it to fall to around 11,000 in 2023.
Value Stocks to Outperform Growth Stocks
In 2023, long-duration assets are expect to struggle, leading to value stocks potentially outperforming growth stocks.
S&P 500 Will Have Another Negative Year
The S&P 500 is expected to struggle in 2023 due to the potential for the Fed to raise rates higher than anticipated, sticky inflation, and uncertainty around earnings. The index may see a peak fear capitulation moment when it trades down to around 3,000. However, it is expected to recover and finish the year around 3,500.
Increased Volatility
As the economy faces uncertain conditions, it is likely that we will see increased volatility in the stock market. This could be due to a variety of factors, including changes in interest rates, inflation, and economic growth. Investors should be prepared for fluctuations and consider strategies such as diversification to mitigate risk.
Emerging Markets to Outperform Developed Markets
Emerging markets may outperform developed markets in 2023 as they offer higher growth potential and have more room to recover from the economic impacts of the COVID-19 pandemic. However, it is important to note that emerging markets also come with higher risk and volatility.
Continued Impact of COVID-19
While the roll-out of vaccines has brought hope for a return to normalcy, the COVID-19 pandemic is expected to continue to impact the stock market in 2023. This could be through disruptions to supply chains, changes in consumer behavior, and shifts in the global economy. It is important for investors to stay informed about developments and how they may impact their investments.
Technology and Healthcare Sectors to Lead the Way
The technology and healthcare sectors are expect to continue to lead the way in 2023, with growth potential in areas such as e-commerce, telemedicine, and innovative technologies. These sectors may be particularly attractive to investors looking for long-term growth opportunities.
Increased Focus on Sustainability
Sustainability and environmental, social, and governance (ESG) factors are expect to continue to gain importance in the stock market in 2023. Investors may increasingly consider these factors when making investment decisions, and companies may face increased pressure to meet sustainability goals.
Conclusion
2023 is shaping up to be a year of uncertainty and change in the stock market. It is important for investors to stay informed and be prepared for potential shifts in the economy and market conditions. By keeping a long-term perspective and diversifying investments, investors can navigate these challenges and potentially find opportunities for growth.
