Economic News
Earnings, Recession, Inflation To Lead US Stocks in 2023
U.S. stock investors couldn’t be more ready to put 2022 behind them, a grueling year characterized by market-punishing Federal Reserve rate hikes aimed at taming the highest inflation in 40 years.
With only a few trading days left in 2022, the S&P 500 (SPX) is down about 20% year to date, on pace for its largest calendar-year drop since 2008. The damage has been even worse for the Nasdaq Composite (IXIC), which has fallen by about 34% this year.
High-profile fatalities include Amazon.com Inc (AMZN) shares, which have fallen about 50% this year, Tesla Inc (TSLA) shares, which have fallen around 70%, and Facebook parent Meta Platforms Inc (META) shares, which have fallen around 65%. Meanwhile, energy stocks have defied expectations by posting massive increases.
Inflation, and the Fed’s zeal in attempting to manage it, will most certainly remain a significant driver driving market performance as 2023 begins. However, investors will be looking for the effects of rising interest rates, such as how tighter monetary policy affects the economy and whether it makes other assets more competitive with stocks.
Here are some of the major themes for the US stock market in 2023.
SOFT LANDING OR RECESSION?
Perhaps the most important concern for equities as the new year begins is whether the economy is headed for a recession, as many investors believe.
If a recession begins next year, equities could fall further: According to historical evidence, a bear market has never bottomed before the start of a recession.
According to Truist Advisory Services, the S&P 500 has fallen by an average of 29% during recessions since World War Two. However, these drops are frequently followed by a significant rebound.
ARE YOUR PROFITS AT RISK?
Investors are also concerned that corporate profit expectations may not have properly accounted for a potential slowdown, leaving stocks vulnerable to further declines.
According to Refinitiv IBES, consensus analyst estimates project S&P 500 earnings to climb 4.4% in 2023. According to Ned Davis Research, incomes fall by an average yearly rate of 24% during recessions.
TINA, WHERE ARE YOU?
The Fed’s rate hikes have raised bond yields and generated competition for equities, reversing the low-yield environment that prevailed for more than a decade and gave rise to the acronym “TINA,” which stands for “there is no alternative” to stocks.
Rates on 10-year Treasury Inflation-Protected Securities (TIPS) – often known as real yields since they exclude predicted inflation – were recently about 1.5%, having reached their highest level in over a decade in October.
Nonetheless, some investors have seen that stocks performed well in previous eras when yields were significantly higher.
CAN VALUE VAULT IN THE FUTURE?
In the previous year, value companies – typically defined as those trading at a discount on metrics such as book value or price-to-earnings – outperformed tech and other growth sectors, reversing long-term trends.
With higher yields and concerns about profit growth putting pressure on tech and growth companies, the question is whether value, which is disproportionately represented by financial, energy, and defensive sectors, is prepared for another year of outperformance.
A DOLLAR MAKES A DENT
The dollar’s rise against other currencies this year has harmed the revenues of many American companies, making it more expensive for international corporations to change their earnings back into their home currency.
The dollar has given back some of its recent gains, and whether it continues to fall depends in part on market estimates of how aggressive the Fed will be in comparison to other major central banks to rein in inflation.
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