The outlook for next year is slightly better for stocks, but it looks like it could be ugly in the first half. Wall Street strategists are revealing their expectations for 2023. Some share the view that the first half could be very rough, and the market may be testing its October lows. Then there is a projected recovery in the second half. Some expect the market not to be much higher than it is now by the end of next year. “We’re all saying the same thing,” said Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets. “We are going to retest the lows. Earnings will fall.” Calvasina expects the S & P 500 to end the year at 4,100. “My thesis is a flat year consensus. I think the median strategist is about 4,000,” she said. “If there is a risk, it is to the upside, not to the downside after the bad year we had.” The S & P 500 is down about 15% in 2022. Strategists are also looking at a period when Federal Reserve tightening could tip the economy into a recession in early 2023. Opinions vary on how deep There could be a downturn, and some hope. the Fed could still withdraw softly. “Our view of risk markets in 2023 consists of 2 periods: market turmoil and economic decline that will force interest rate cuts, followed by economic and asset recovery,” JPMorgan’s Marko Kolanovic wrote in his outlook. The strategist expects low rates to be retested due to a significant decline in earnings as interest rates rise. “We are thinking that this could happen between now and the end of the first quarter of 2023,” he said. Bank of America’s chief investment strategist, Michael Hartnett, sees a similar split for 2023. “We remain bearish risk assets in H1, set to turn bullish in H2 as narrative shifts from inflation ‘shocks’ and rates of ’22 to recession and shocks’ credit. in H1 ’23,” he wrote in his opinion. Jeff Kleintop, Charles Schwab’s chief global investment strategist, expects a shallow recession may have already begun. He predicts that the first half will be worse for stocks than the back half of the year, with choppiness similar to the last six months. “We see positive results for the year, although high volatility continues for the coming months,” he said. “You’re going to pay a price for a better year next year.” A market case I told Calvasina that the clues for the coming year could be found in the 2003 period, and how the market behaved at that time. “If you look at the playbook, this is the time when the equity market should be breathing,” she said. “The market took off in December, and it went back into March when it bottomed out.” Back in 2003, the market was trading off the Y2K tech bubble. Now, the market is trading off the post-pandemic stimulus. “They were both large cap growth bubbles, pulled forward to wear,” she said. “There are many ways to share the market with that period.” Calvasina said investors could already expect a turbulent first half. “Whatever everyone is talking about for the next year, you start responding to it in December,” she said. The economy should also gain clarity in the first quarter, and companies could help provide important insight into earnings season. “We need to see how confident companies really are. I think we’ll get a bigger taste of that in the coming months. At that point, we’ll have some visibility into 2023,” she said. Calvasina said the level of pessimism about the stock market is a positive contrarian sign. “If companies stay calm and don’t fire too many people, I see a case for fighting it,” she said. “I can see the seeds of the upside. I can also see the seeds of the downside.” How to play it Kleintop said he used a strict rule in 2022 about owning stocks, and that trend should continue to work in 2023. “If you look at this year, it’s been one mantra there,” he said. “It’s not about sector or countries. It’s about quality. Companies that have a lot of cash flow relative to their valuations, and those that pay high dividends. Those strategies have worked all year.” Kleintop said quality names will help investors avoid worrying about where the market will bottom or when to change their strategy. “If you want to be in tech, buy the highest dividend payers. They’re doing better,” he said. “The other overall theme is international. We’ve finally started to see better international stocks this year.” If the dollar starts to weaken, that would also be a tailwind for foreign stocks, he said. Calvasina expects small caps to be an area of high performance, and still sees value in energy and financials. “If I could make one trade, and buy one thing right now, it would be small caps,” she said. Traditional technology, such as semiconductors and software, are areas she is looking at, but not internet names. “Everything is trading on the 10 year [ Treasury]. If yields decline you need to have some growth in your pocket,” she said. “Don’t buy all the growth. Be very selective … I’ve been selectively looking at tech names as rebound plays.”
