(Bloomberg) — Stock investors hoping for a better year in 2023 will be disappointed, according to Goldman Sachs Group Inc. strategists, who said the bear market phase is far from over.
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“Conditions typically consistent with equity bottoms have not yet been reached,” strategists including Peter Oppenheimer and Sharon Bell wrote in a note on Monday. They said a peak in interest rates and lower valuations reflecting the recession were needed before a sustained stock market recovery could occur.
Strategists estimate the S&P 500 will end 2023 at 4,000 index points – just 0.9% higher than Friday’s close – while Europe’s benchmark Stoxx Europe 600 will end next year about 4% higher at 450 index points point. Barclays Plc strategists, led by Emmanuel Cau, have the same target for the European gauge and said the road there will be “difficult”.
The comments come after a recent rally – led by softer US inflation data and news of an easing of Covid restrictions in China – saw several global indices enter technical bull market levels. The sharp recovery since mid-October followed a tumultuous year for global markets as central banks moved to aggressively raise interest rates to tame rising inflation, fueling fears of a recession.
Goldman strategists said the gains were not sustainable because stocks typically do not recover from lows until the pace of deterioration in economic and earnings growth slows. “In the short term, the path for equity markets is likely to be volatile and to the downside,” they said.
The view echoes that of Morgan Stanley’s Michael Wilson, who reiterated today that U.S. stocks will end 2023 largely unchanged from current levels and will have a bumpy road to get there, including a big first-quarter decline.
According to his Monday note, Wilson’s clients have bucked his view of a 3,000-point drop in the S&P 500 in the first three months of next year, down 24% from Friday’s close. “What has yet to be assessed is the risk to earnings and that is what will ultimately act as a catalyst for the market to make new lows,” he said.
Still, strategists are divided on the stock’s fate after a volatile 2022.
“Three double-digit gains this year in the S&P 500 prove that as tough as 2022 has been for equity markets, there’s enough resilience to suggest this year could be a harbinger of better times ahead,” John Stoltzfus, chief investment strategist at Oppenheimer Asset Management, wrote in a note on Monday.
Meanwhile, Goldman strategists expect Asian stocks to outperform next year, with the MSCI Asia-Pacific ex-Japan ending the year 11% higher at 550 points. Their counterparts at Citigroup Inc. were bullish on Chinese stocks today, saying Beijing’s turn to Covid Zero and property should lift earnings.
With the bear market still in full swing for now, Oppenheimer and his team recommended focusing on quality companies with strong balance sheets and solid margins, as well as those with great value and energy and resource stocks where valuation risks are limited.
(Updates with comments by Oppenheimer AM in paragraphs 9 and 11)
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