Inflation, recession and earnings to drive US stocks in 2023 According to Reuters

© Reuters. FILE PHOTO: A trader works on the trading floor at the New York Stock Exchange (NYSE) in New York City, U.S., December 14, 2022. REUTERS/Andrew Kelly

By Lewis Krauskopf

NEW YORK (Reuters) – U.S. stock investors couldn’t be more eager to turn the page in 2022, a brutal year dominated by Federal Reserve interest rate hikes that punish the market designed designed to reduce inflation to the highest level in 40 years.

The coin is down nearly 20% year-to-date with just a few trading days left in 2022, the biggest drop in a calendar year since 2008. The carnage is even more severe for the coin. against copper, which has fallen nearly 34% so far this year.

Major casualties include Inc (NASDAQ:)’s once-surging stock, which has fallen about 50% this year, while shares of Tesla (NASDAQ:) Inc are down about 70% and its parent company. Facebook’s Meta Platforms Inc (NASDAQ:) stock has lost about 65%. Meanwhile, energy stocks bucked the trend by posting impressive gains.

IMAGE: S&P 500 Timeline (

Inflation and the Fed’s aggressiveness in trying to contain it will likely remain the key drivers of equity performance as 2023 looms. But investors will also be watching for the impact of higher interest rates, including the impact of tighter monetary policy on the economy, and whether it will make other assets more competitive with equities. vote or not.

Here are some of the big themes for the US stock market in 2023.

Recession OR SOFT LAND?

Perhaps the biggest question that will affect stocks as the new year begins is whether the economy is headed for a recession as many investors are expecting.

Historical data suggests that if a recession kicks in next year, stocks could fall into another slide: The bear market never bottomed out before the downturn started.

Recessions tend to hit stocks hard, with the S&P 500 falling an average of 29% in recessions since World War II, according to Truist Advisory Services. However, those declines are often followed by strong rebounds.

IMAGE: S&P 500 returns during a recession (


Investors are also concerned that the company’s earnings estimates may not fully account for the possibility of a recession, leaving the stock more vulnerable.

Consensus analyst estimates S&P 500 earnings are expected to grow 4.4% in 2023, according to Refinitiv IBES. However, earnings decline at an average annual rate of 24% during a recession, according to Ned Davis Research.

GRAPHIC: S&P 500 earnings, year-over-year change (


The Fed rate hike has pushed bond yields higher and created competition for equities, despite the low-yield environment that has dominated for more than a decade and led to the acronym “TINA” or “no.” Is there an alternative” to stocks.

Yields on the inflation-protected 10-year Treasuries (TIPS) – also known as real yields because they eliminate expected inflation – were recently around 1.5%, after reaching the highest in more than a decade in October.

However, some investors have noted that the stock has performed well in previous periods when yields were even higher.

GRAPHIC: Rising US Treasury yields and stock performance (


Over the past year, value stocks — often defined as those that trade at a discount based on metrics like book value or price-to-earnings — have held up better than technology stocks. and other growth stocks, reversing trends that have been in place for most of the time. past decade.

With higher yields and doubts about earnings growth likely to weigh on growth and tech stocks, the question is whether value – which is more represented by financial, energy and quality and defense – ready for another year of outstanding performance.

GRAPHIC: Value vs growth stocks (


The dollar’s appreciation against other currencies this year has hit the earnings of many US companies, making it more expensive for companies to convert their earnings back into the local currency. multinational.

The greenback has shed some of those gains in recent weeks, and the continuation of the reversal will depend in part on investors’ perception of how aggressive the Fed is relative to other global central banks. .

IMAGE: Forex pain (


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