Inflation, recession and earnings among factors to drive U.S. stocks in
2023
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[December 28, 2022] By
Lewis Krauskopf
NEW YORK (Reuters) - U.S. stock investors could not be more eager to
turn the page on 2022, a brutal year dominated by market-punishing
Federal Reserve rate hikes designed to tamp down the steepest inflation
in 40 years.
The S&P 500 is down nearly 20% year-to-date with only a few trading days
left in 2022, on pace for its biggest calendar-year drop since 2008. The
carnage has been even more severe for the Nasdaq Composite, which had
tumbled by nearly 34% so far for the year.
High-profile casualties include the once-soaring shares of Amazon.com
Inc, which have slumped around 50% this year, while those of Tesla Inc
are down some 70% and Facebook parent Meta Platforms Inc shares have
lost about 65%. Meanwhile, energy stocks have bucked the trend by
posting eye-popping gains.
Inflation, and the Fed's degree of aggressiveness in trying to contain
it, will likely remain a critical factor driving equity performance as
2023 gets under way. But investors will also be watching for fallout
from higher interest rates, including how tighter monetary policy
ripples through the economy and whether it makes other assets more
competitive with stocks.
Here is a look at some of the big themes for the U.S. stock market in
2023.
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RECESSION OR SOFT LANDING?
Perhaps the biggest question that will sway stocks as the new year
begins is whether the economy is headed for a recession, as many
investors are expecting.
If a recession starts next year, stocks could be set for another slide:
A bear market has never bottomed before the beginning of a recession,
historic data showed.
Recessions tend to hit stocks hard, with the S&P 500 falling an average
of 29% during recessions since World War Two, according to Truist
Advisory Services. Those declines, however, have usually been followed
by a strong rebound.
PROFITS AT RISK?
Investors are also concerned that corporate earnings estimates may not
have fully factored in a potential slowdown, leaving more downside for
stocks.
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![](../images/122822PIX/busine87.jpg)
A trader works on the trading floor at
the New York Stock Exchange (NYSE) in New York City, U.S., December
14, 2022. REUTERS/Andrew Kelly
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Consensus analyst estimates project S&P 500 earnings to rise 4.4% in
2023, according to Refinitiv IBES. Yet earnings fall by an average
annual rate of 24% during recessions, according to Ned Davis
Research.
GOODBYE, TINA?
The Fed’s rate hikes have pushed up bond yields and created
competition for equities, flying in the face of the low-yield
environment that predominated for more than a decade and gave rise
to the acronym “TINA,” or “there is no alternative” to stocks.
Yields on the 10-year Treasury Inflation-Protected Securities (TIPS)
- also known as real yields because they strip out projected
inflation - recently stood at around 1.5%, after hitting their
highest level in over a decade in October.
Still, some investors have noted that stocks fared well in past
periods when yields were even higher.
CAN VALUE VAULT AHEAD?
In the past year, value stocks - commonly defined as those trading
at a discount on metrics such as book value or price-to-earnings -
held up better than tech and other growth shares, reversing trends
that had been in place for much of the past decade.
With higher yields and doubts about profit growth standing to
pressure tech and growth stocks, the question is whether value -
which is more heavily represented by financial, energy and defensive
groups - could be poised for another year of outperformance.
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DOLLAR MAKING A DENT
The dollar’s surge against other currencies this year hurt the
earnings of many U.S. companies, making it more expensive for
multinationals to convert their earnings back into their home
currency.
The greenback has pared some of those gains in recent weeks and a
continued reversal would depend in part on investor perceptions of
how hawkish the Fed will be relative to other global central banks.
(Reporting by Lewis Krauskopf in New York; Additional reporting by
Saqib Iqbal Ahmed in New York; Editing by Ira Iosebashvili and
Matthew Lewis)
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