Wall Street and Morgan Stanley: 2023 will be the worst for stock movements

Wall Street strategists say that recovering capital for 2023 will not be easy and stocks are expected to decline toward their lowest levels in the first half of 2023 the main risks are high inflation, stagnation, and shrinking profits.

Investors must prepare for the worst year in terms of stocks since the global financial crisis, as the current year will be nothing but a folded page in the dictionary of the financial crisis, as the next is more dangerous.

That’s the blunt message from chief strategists at Morgan Stanley, Goldman Sashes Group, and others who warn that stocks will face new first-half lows as corporate earnings succumb to weak economic growth, inflation remains high, and central banks stay tight.

The second half will point to a recovery once the Fed stops raising rates, they say — but it will likely be a muted recovery and still leave stocks only moderately higher than where they were at the end of 2022.

Mislav Matejka, the global equity strategist at JPMorgan Chase & Co., said, “The risks that stock markets have grappled with this year have not gone away and that makes me nervous about the outlook, especially in the first half.”

The median target for the 22 strategists interviewed by Bloomberg, the S&P 500 will end next year at 4,078 points — about 7% above current levels. The most optimistic forecast is for an increase of 24%, while the bearish trend sees it declining by 11%. In Europe, a similar survey of 14 strategists predicted an average gain of about 5% for the Stoxx 600.

Tightening monetary policy, the war in Ukraine, and the energy crisis in Europe fuelled losses in global markets as these factors have already dampened the recent rally in stocks.

Even the better news about inflation came with a big caveat because it did not affect central banks in their focus on controlling it. The hawkish tones from both the Federal Reserve and the European Central Bank last week sent sharp declines and reminded stock investors that the timing of the long-awaited policy change will be no small feat.

If that message hasn’t already gotten through, the Bank of Japan hit it straight back on Tuesday with a surprise adjustment to its bond yield policy.

JPMorgan expects the S&P 500 to retreat towards the lows seen in 2022 before the Fed triggers a rebound in the second half that would leave it nearly 10% higher than current levels. At its worst point this year, in October, the index fell 25% to 3,577 points.

Top money managers also expect a tough start to 2023, with gains skewing from the last halving, according to a Bloomberg News survey published this month.

For those who take an optimistic view, they can point to the resilience of the US economy, the slowing pace of interest rate increases, and the reopening of China from its strict Covid lockdowns.

But despite all of that, one of the main points of view agreed upon among strategists is that stock markets are not yet reflecting a pessimistic economic outlook in general.

Michael Wilson, a senior analyst from Morgan Stanley, sees the S&P 500 falling 21% more in the first quarter. The subsequent recovery will see the index end the year at around 3,900 points. Corporate earnings are linked to a deteriorating economic outlook. While profits showed surprising resilience in the face of runaway inflation in 2022, they are expected to collapse next year as pressure builds on margins, and weak demand raises risks of stagflation.

Wilson warned this week that the decline in earnings could match that seen during the 2008 financial crisis and that this does not bode well for stocks at the moment.