What will happen to the stock market next year according to JP Morgan and Goldman Sachs

Investors poised to turn the page in the worst year for stocks since the global financial crisis should brace themselves for more losses in 2023.

That’s the blunt message from the top strategists at Morgan Stanley, Goldman book Group Inc. and others, who are warning that stocks face fresh declines in the first half as corporate earnings succumb to weaker economic growth and soaring inflation, and central banks remain firmly hawkish.

They say the second half of the year will mark a rebound after the Federal Reserve stops raising interest rates – but it’s likely to be a quiet recovery and will still keep stocks only moderately higher than they were at the end of the year. year 2022.

Mislav Matejka, global equity strategist at JPMorgan Chase & Co., said in an interview.

The median target of 22 strategists released by Bloomberg is for the S&P 500 to end next year at 4,078 – about 7% above current levels. The most optimistic forecast is a 24% gain, while the bearish view sees it fall 11%. In Europe, a similar survey of 14 strategists Average gain is expected to be around 5% for the Stoxx 600.

The cautious central case reflects the mountain of challenges ranging from monetary tightening to wars in Ukraine and Europe energy crisis. The first of which helped quell the recent stock rally.

Even better news on inflation comes with a big caveat because it doesn’t stop central banks from focusing on controlling inflation. The hawkish tones from both the Fed and the European Central Bank last week caused a sharp drop in equity and reminded investors that timing for a policy change was awaited. long will not be simple.

If such notice has not been approved, the Bank of Japan knock it home on Tuesday with a shock adjustment to its bond yield policy.

To make sure, consecutive years of decline is very rare for U.S. stocks, so after this year’s drop, there’s a low chance they’ll record their annual decline again in 2023. Since 1928, the S&P 500 has fallen for only two consecutive years in the last two years. four times: the Great Depression, World War II, the oil crisis of the 1970s, and the bursting of the dot-com bubble at the turn of the century.

JPMorgan’s team expects the S&P 500 to return to all-time lows in 2022 before the Fed pivots to spur a recovery in the second half of the year, leaving it about 10% above current levels. At its worst time of the year, in October, the index fell 25% to 3,577 points.

Top money managers also predict a rough start to 2023, with profits tipped to the second half, according to Bloomberg News survey published this month.

For the optimists, they could point to the resilience of the US economy, a slower rate of interest rate hikes and the reopening of China after the strict lockdowns due to Covid- 19.

But despite all that, one of the main consensus views among strategists is that the stock market has yet to reflect a generally optimistic economic outlook.

Christian Mueller-Glissmann and Cecilia Mariotti at Goldman Sachs said late last month that their model implied a 39% probability of a U.S. growth slowdown over the next 12 months, but risk assets were only priced in. at 11%.

Michael Wilson of Morgan Stanley — a staunch bearer who ranked first in this year’s Institutional Investor survey — sees the S&P 500 drop another 21% in the first quarter. The ensuing rally would see the index end the year at around 3,900 points, implying a roughly 2% gain from Monday’s close.

Tied to the deteriorating economic outlook is corporate earnings. While earnings show surprising resilience to high inflation in 2022, profits are expected to decline next year as pressure on margins increases and demand weaker, creating a higher risk of stagnant inflation.

Wilson warned this week that the drop in profits could equate to the 2008 financial crisis and that this is not priced into the stock.

One american bank Survey of Corp. also showed that fund managers expect earnings prospects to deteriorate next year, which makes them more optimistic about bonds than stocks. Their relative position in stocks relative to fixed income is at its lowest level since 2009.

“We do not expect this year’s constructive growth backdrop to continue into 2023,” said Dubravko Lakos-Bujas, strategist at JPMorgan and #2 in the Institutional Investor survey. He predicts profits will fall 9% in the US, 10% in the euro area and 4% in Japan.

The drop in earnings in Europe may not be as bad as during typical recessions, according to Goldman Sachs strategist Sharon Bell. Where previous contractions have slashed profits by around 30%, the drop could be limited to 8% in part due to a push by miners and luxury goods from China’s expansion. Loosening the blockade measures because of Covid.

In Asia, Beijing’s departure from the Covid Zero policy has also improved the outlook for stocks there.

Morgan Stanley strategists including Jonathan Garner still weigh regional emerging market stocks more heavily than developed markets because they are “more confident that a new bull cycle is underway. begin”. Meanwhile, the team at Nomura Holdings Inc. said a recession in the West will allow Asia to perform better given its cheaper valuations and better fundamental outlook.

Mehvish Ayub, senior investment strategist at The road for government Global Advisor. “It’s an uncertain outlook going on with a lot of volatility to navigate. Equity is still challenged.

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