In 2023 The Market Will Receive A Wake-Up Call

Fed Reserve Gov. Christopher Waller and several other experts believe that the market overreacted to the softer-than-expected October CPI that was released last week, which caused the S&P 500 to reach its highest level in five months.

Stock market futures are pointing to a weaker start as the final full week before Thanksgiving begins. This suggests that his words may be getting through to investors. This week, we will also receive information regarding retail sales.

And now is the time of year when Wall Street will begin to release its market estimates for the year 2023, a chore that is certainly not one to be envied. Our prediction of the day comes from Morgan Stanley, where a group of analysts led by renowned U.S. strategist Mike Wilson predict that the S&P 500 SPX will end the following year at almost the same level that it is currently at, which is 3,900.

According to the bank, even though it might look like things are going to be relatively calm, the interval in between will be anything but calm as Wall Street receives a wake-up call regarding profits hopes that are still way too rosy.

According to Wilson and the rest of the team, “We remain extremely convinced that 2023 bottom up consensus profits are materially too high.” As a result, they reduced their earnings per share prediction for 2023 down another 8% to $195, which is 16% lower than the consensus and 11% lower yearly.
“After whatever is left of this current tactical rally, we envisage the S&P 500 discounting the earnings risk for ’23 sometime in Q123 via a price trough somewhere between 3,000 and 3,300. According to Wilson, “We assume this happens before the eventual trough in EPS, which is common for earnings recessions.”

According to his statement, “Equities should begin to process that growth reacceleration well in advance, and they should rebound rapidly to conclude the year at 3,900 in our base case.”

Wilson stated that they will continue to take a defensive stance with their portfolio until those estimates “reflect the bust.” They increased their overweight position in staples while decreasing their overweight position in real estate to equal weight, leaving their overweight positions in healthcare, utilities, and energy companies with a defensive orientation. The underweight status of consumer discretionary spending and technological hardware has not changed.

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The bright side is that if things continue to be difficult in 2023, they may get better in 2024. Wilson and his colleagues anticipate a strong rebound in the form of positive operating leverage growth in 2024, which means that revenue will grow at a faster rate than expenses will, and they refer to this as “the next boom.” Regarding the current state of the markets, Wilson advises investors to have a flexible mindset, referring to the bank’s tactical shift toward a positive stance four weeks ago.

“We think we will now reach the final stages of the bear market when two-way risk must be acknowledged,” he added. “After a 12-month period in which being doggedly pessimistic paid off handsomely, we think we will now enter the final stages of the bear market.”

In the late cycle period between the Fed’s most recent rate hike and the start of the next recession, he sees a “window of opportunity when long-term interest rates typically fall prior to the magnitude of the slowdown being reflected in earnings estimates and the economy.” He defines this late cycle period as falling between the Fed’s most recent rate hike and the start of the next recession.
However, keep in mind that they are merely pausing for a talking pause here. According to Wilson, “while we think there is a window for stocks to run into year-end as the markets dream of a pause, a Fed that is cutting is probably a bad sign that the recession has arrived (negative payrolls),” and this is despite the fact that we believe there is a window for stocks to run until the end of the year.