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NEW YORK Reuters -- U.S. stocks will increase by around 6% next year after a rough start to 2023, as higher interest rates take their toll on the U.S. economy, according to a poll of strategists on Tuesday.
The U.S. Federal Reserve hikes rates to fight inflation and the U.S. earnings growth turns flat are some of the biggest risks to the market, according to the strategists.
The S&P 500 index will end next year at 4,200, according to the median forecast of 41 strategists polled by Reuters during the last two weeks. That is 6.0% higher than Monday's close of 3,963. The median forecast for the year- end 2023 is down from a target of 4,700 in a Reuters poll conducted in late August.
It's a tale of two halves. The market is seeing a rougher start to the year and closing the year in recovery mode, said Savita Subramanian, head of U.S. equity and quantitative strategy at BofA Securities, at the firm's outlook conference Monday.
The firm expects to see the S&P 500 ending next year at 4,000, and that there will be a mild recession in the first half of 2023 and an easing of Fed policy by the end of next year.
Wall Street shares have rallied strongly in recent weeks due to hopes that the Fed will be less aggressive in its rate increases. The Fed delivered a fourth consecutive 75 basis-point interest rate hike earlier in November.
The path of inflation in the coming months will be a factor in rate policy. The increase in consumer prices fell below 8% for the first time in eight months, as U.S. consumer prices rose less than expected in October.
The S&P 500 is down almost 17% for the year to date, having fallen into its second bear market since the 2020 global sell-off caused by the coronaviruses.
Professional strategists have had poor track records in regards to stock market returns, especially at the beginning of a new year, because so much remains unknown, but their forecasts provide valuable insight into sentiment on Wall Street.
Most strategists said that the earnings picture would get worse over the next six months rather than improve, with some projected no earnings growth for the S&P 500 in 2023.
Terry Sandven, chief equity strategist at U.S. Bank Wealth Management in Minneapolis, Minnesota, said that company guidance for 2023 is largely elusive because of economic uncertainty, ongoing inflationary pressures and lack of visibility into consumer and business spending in 2023. Sandven thinks the S&P 500 will end at 4,275 by the end of 2023.
The analysts think fourth-quarter U.S. earnings will decline for the first time in two years, based on IBES data from Refinitiv, and estimates have fallen for 2023 as well.
The full-year profit growth for 2023 is projected to be at 4.9% compared to the expected growth of 5.8% for all of 2022, according to the data.
Earnings estimates are closely watched because of their impact on stock valuations. The S&P 500's forward 12 month price-to- earnings ratio is now at about 18 compared with 22 at the end of December 2021 and a long-term average of about 16 according to Refinitiv data.
There is still uncertainty about earnings, whether that's going to stabilize or not. King Lip, chief strategist at BakerAvenue Wealth Management in San Francisco, said that the rate may start to come down towards the middle of the year. BofA thinks energy has more room for the sector, as it is up 61% for the year and is the best performing S&P 500 sector. She is underweight, among other sectors. Lip wouldn't recommend industrials, but he wouldn't recommend energy.
The Dow Jones industrial average is expected to finish the year at 36,500, up 7.8% from Monday's close.