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In this year’s write-up, I will review my ten predictions for 2023. Anything can happen, but this exercise has a point, which helps me lay out a game plan and thought process for the path that may lie ahead this coming year. You can see how my 2022 predictions did here.
2022 was an impossible year to predict. Nearly all of the predictions I at the end of 2021 proved wrong or not aggressive enough, except for the one expecting the to finish 2022 at around 3,800, which as of this writing, the index closed at 3,844 on Dec. 23.
2023 may be even harder to predict because the economy appears to be at a point where things could turn out to be either better than feared or worse than expected.
rates have cooled after peaking in the summer of 2022, but it is unclear how much further they will fall. Meanwhile, the bond market predicts a recession, while the has been robust in the third and fourth quarters of 2022.
1. Inflation Will Plummet
The inflation swaps market seems to think that the CPI will come crumbling down in 2023, reaching a rate of 2.5% by the middle of the year.
US CPI Price Chart
Many measures suggest that inflation may come down, but others indicate it is sticky and may get held up at higher levels than the market thinks. The Atlanta Fed 12 Month Sticky CPI rose to a cycle in November up to 6.6%.
That is the highest reading for the measure since 1982. It seems more likely that CPI will get stuck somewhere in that 4 to 6% range in 2023 and doesn’t come down as quickly as the market thinks.
Sticky Inflation Rate Chart
2. A Stagflationary Environment
A sticky inflation rate in the 4 to 6% range likely means that nominal GDP growth will slow, but we aren’t seeing a recession in 2023. It is more likely to lead to a stagflationary environment, resulting in a near 0% real growth rate.
US GDP Chart
3. No Earnings Recession
Since companies generate sales and earnings in nominal terms, earnings estimates for the S&P 500 will not fall nearly as much as some are looking for.
Companies will be able to manage margins just enough to keep earnings equal to 2022 levels, meaning no earnings recession in 2023, no growth either, and around $220 in earnings for the S&P 500 versus the near 7% growth rate estimates at the end of 2022.
SPX EPS Chart
4. Key Rates to Rise Above 6%
With inflation stuck in the 4 to 6% range and the economy holding together, the Fed will be forced to raise rates above the 5.1% level indicated at the December FOMC meeting. It will most likely result in overnight climbing above 6%.
5. 2-year Yields to Shoot Up
Sticky inflation and a more aggressive Fed will lead to the rate pushing even higher to around 5.25%.
US Govt Bonds 2-Yr Yield Weekly Chart
6. 2-Year Will Pull 10-Year Yields Higher
A rising US 2-year will pull the rate higher while keeping the yield curve inverted around -50 bps. That would equate to the 10-year rate rising to around 4.75%.
US Govt Bonds 10-Yr Yield Weekly Chart
7. U.S. Dollar to Stagnate
While rates in the US are likely to head higher, rates in Europe and Japan are likely to run higher too. That will leave the in stagnation, resulting in the dollar trading between 101 and 115.
US Dollar Index Daily Chart
8. Bitcoin Prices to Crater
Higher interest rates and tighter financial conditions will be bad news for , making it an undesirable asset since it creates nothing and has no intrinsic or store of value. As a result, bitcoin will fall to around 11,000 in 2023.
BTC/USD Daily Chart
9. Value Stocks to Outperform Growth Stocks
Additionally, long-duration assets will struggle in 2023, so value stocks will probably outperform growth stocks again in 2023.
SPYG/SPYV Weekly Chart
10. S&P 500 Will Have Another Negative Year
The S&P 500 will struggle in 2023, and with the Fed likely to raise rates higher than expected, inflation staying stickier, and earnings in doubt, the S&P 500 will fall again for a second straight year.
The index is likely to see a peak fear capitulation type of moment when it trades down to around 13 to 14 times earnings.
SPX Index Daily Chart
At 14 times $220 in earnings, which equals 2022, the S&P 500 is worth only 3,100, and at 13 times earnings, just 2,800.
But given how the market likes to trade to extremes, it may overshoot to the downside, trading below 3,100 and filling a gap from May 2020 at 2,867. Only to rebound and finish the year around 3,200.
S&P 500 Index Daily Chart
Original Post
10 Monster Stock Market Predictions for 2023
