2023 Wall Street master pack
Fundamentals from most of analysts views on the new year
2023 is going to be a difficult year. It will be hard to make forecasts and the volatility will be higher than the recent past.
The key is to build and respect a strategy that considers multiple scenarios: this is why we selected the main players views on the upcoming year for most of the asset classes.
BofA, BlackRock, Citi, Credit Suisse, Goldman Sachs, HSBC, JPMorgan and Morgan Stanley will give you different perspectives to prepare you for 2023.
Bank of America
With inflation, the dollar and Fed hawkishness peaking in the first half of 2023, markets are expected to tolerate more risk later in the year. The S&P 500 typically reaches its bottom six months ahead of the end of a recession, and as a result, bonds appear more attractive in the first half of 2023, while the backdrop for stocks should be better in the later half. We expect the S&P to end the year at 4,000 and S&P earnings per share to total $200 for the year.
BlackRock Investment Institute
The new regime of greater macro and market volatility is playing out. A recession is foretold; central banks are on course to overtighten policy as they seek to tame inflation. This keeps us tactically underweight developed market equities. We expect to turn more positive on risk assets at some point in 2023 – but we are not there yet. And when we get there, we don’t see the sustained bull markets of the past.
Equity valuations don’t yet reflect the damage ahead, in our view. We will turn positive on equities when we think the damage is priced or our view of market risk sentiment changes. Yet we won’t see this as a prelude to another decade-long bull market in stocks and bonds.
In equities, we look to lean into sectoral opportunities from structural transitions – such as healthcare amid aging populations – as a way to add granularity even as we stay overall underweight. Among cyclicals, we prefer energy and financials. We see energy sector earnings easing from historically elevated levels yet holding up amid tight energy supply. Higher interest rates bode well for bank profitability. We like healthcare given appealing valuations and likely cashflow resilience during downturns.
Citi
In equities we take off the European underweight, and shift it to the US. We go long China and stay underweight in Asia excluding China. We reduce the UK equity long to keep the overall level of equity risk unchanged. These positions are FX hedged. For US sectors we remain defensive: long healthcare and utilities against industrials and financials.
We see dollar performance split next year. For the first several months, we’d expect a resumption of risk asset underperformance, likely via the earnings channel for equities. This likely keeps the dollar supported as it has a strong inverse correlation between with equities. Moving into the second half of 2023, the dollar could enter into a depreciation regime.
In the near term, we believe equities in companies with strong balance sheets and healthy cash flows will provide investors with greater portfolio resilience.
We expect that as 2023 progresses, opportunities to increase portfolio risk will evolve. Once interest rates peak, we will likely shift toward non-cyclical growth equities. These have already repriced lower, and we expect them to begin performing once more before cyclicals.
In the recovery period, we will also seek a re-entry opportunity in cyclical growth industries, as value equities may prosper when supply pipelines are unable to meet revived demand.
The dollar could continue rallying for longer than fundamentals justify. Overshoots have been a characteristic of prior periods of dollar strength. Around a durable dollar peak, we will look to add more non-US equities and bonds.
Credit Suisse
We see 2023 as a tale of two halves. Markets are likely to first focus on the “higher rates for longer” theme, which should lead to a muted equity performance. We expect sectors and regions with stable earnings, low leverage and pricing power to fare better in this environment. Once we get closer to a pivot by central banks away from tight monetary policy, we would rotate toward interest-rate-sensitive sectors with a growth tilt.
Goldman Sachs
Investors aren’t getting much compensation for the risk of owning equities or high-yield credit in comparison to lower risk bonds. As a result, equities and high-yield debt are particularly exposed to an economic slowdown or recession.
While bonds have been especially volatile of late, there are signs that these swings are peaking. Higher yields have also reduced the duration risk (the risk that a bond’s price will fall as rates climb) for fixed-income assets at the same time that economic growth is becoming more of a concern. That all suggests that risks are piling up for the equity market next year while bonds might become less risky.
Markets are now pricing in a more dovish Federal Reserve, signalling an expectation that the US central bank will begin lowering its funds rate by the end of next year. Our economists, by contrast, don’t expect any rate cuts in 2023. If the US economy turns out to be more resilient than anticipated and inflation stickier in 2023, stock markets and Treasuries could fall in price.
HSBC
In equities, we prefer France (CAC40) vs Sweden (OMX) and Italy (FTSE MIB) over UK equities (FTSE100).
A turnaround could follow later in the year amid cooling inflation - aided by weaker labour and housing markets - which means central banks can pause rate hikes, with even the prospect of rate cuts later in the year. With better visibility on the policy and economic outlook, investor sentiment will recover from rock bottom levels to take advantage of much improved valuations in riskier asset classes such as equities and high-yield corporate bonds.
For equities, we think price to earnings ratios in developed markets have scope to fall given where bond yields are. But the big risk remains corporate earnings downgrades, which will probably be a driver of weak equity market performance.
Value still makes sense as rates continue to rise, although this needs to be balanced against a deteriorating macro outlook and lower commodity prices. The coming switch in the macro story from stagflation toward recession should favour defensive and quality factors.
JPMorgan
In the first half of 2023, the S&P 500 is expected to re-test the lows of 2022, but a pivot from the Fed could drive an asset recovery later in the year, pushing the S&P 500 to 4,200 by year-end.
JPMorgan Research is reducing its below consensus 2023 S&P 500 earnings per share (EPS) of $225 to $205 due to weaker demand and pricing power, further margin compression and lower buyback activity.
The convergence between the US and international markets should continue next year, both on a dollar and local currency basis. The S&P 500 risk-reward relative to other regions remains unattractive. Continental European equities have a likely recession to negotiate and geopolitical tail risks, but the euro zone has never been this attractively priced versus the US. Japan should be relatively resilient due to solid corporate earnings from the economy’s reopening, attractive valuation and smaller inflation risk compared with other markets.
Within developed markets, the UK is still our top pick. As for EM, its recovery is mostly linked to China. Tactically, the Asia reopening trade led by China is overdue and the activity hurdle rate is very easy, with further policy support likely. We expect around 17% upside for China by the end of 2023.
Both stocks and bonds have pre-empted the macro troubles set to unfold in 2023 and look increasingly attractive, and we are more excited about bonds than we have been in over a decade.
The broad-based sell-off in equity markets has left some stocks with strong earnings potential trading at very low valuations; we think there are opportunities in climate-related stocks and the emerging markets.
We have higher conviction in cheaper stocks which have already priced in a lot of bad news and are offering dependable dividends.
Our 2023 base case of positive returns for developed market equities rests on a key view: a moderate recession has already largely been priced into many stocks.
While we are not calling the bottom for equity markets, we do think that the risk vs. reward for equities in 2023 has improved, given the declines in 2022. With quite a lot of bad news already factored in, we think that the potential for further downside is more limited than at the start of 2022. Importantly, the probability that stocks will be higher by the end of next year has increased sufficiently to make it our base case.
Value stocks are now quite reasonably priced compared with history. We have stronger conviction that value stocks will be higher by the end of 2023 than we do for those growth stocks that still look expensive. However, a peak in government bond yields could provide some support to growth stock valuations in 2023.
While falling earnings forecasts could lead stocks lower, if the magnitude of the decline in earnings is moderate – as we expect – then it would likely only lead to limited further downside for reasonably valued stocks, relative to the declines already seen in 2022.
Even though we expect a challenging macroeconomic environment in 2023 and downward corporate earnings revisions, we think income stocks could have a good year with dividends proving more resilient than earnings. For investors that are tentatively looking to increase their equity exposure, an income tilt could prove relatively resilient in the worst case scenario, while also providing the potential for outperformance in our more optimistic scenario for markets given attractive valuations.
Morgan Stanley
In an environment of slow growth, lower inflation and new monetary policies, expect 2023 to have upside for bonds, defensive stocks and emerging markets.
The S&P 500 will tread water, ending 2023 around 3,900, but with material swings along the way.
Equities next year, however, are headed for continued volatility, and we forecast the S&P 500 ending next year roughly where it started, at around 3,900. Consensus earnings estimates are simply too high, to the point where we think companies will hoard labour and see operating margins compress in a very slow-growth economy.
Investors should consider the higher-yielding parts of the equities market, including consumer staples, financials, healthcare and utilities.
European equities could offer a modest upside, with a forecasted 6.3% total return over 2023 as lower inflation nudges stock valuations higher.
Bank of America
With inflation, the dollar and Fed hawkishness peaking in the first half of 2023, markets are expected to tolerate more risk later in the year. The S&P 500 typically reaches its bottom six months ahead of the end of a recession, and as a result, bonds appear more attractive in the first half of 2023, while the backdrop for stocks should be better in the later half. We expect the S&P to end the year at 4,000 and S&P earnings per share to total $200 for the year.
US rates stay elevated but expect a decline by year end 2023. The yield curve is expected to dis-invert and rates volatility should fall. Both two-year and 10-year US Treasuries should end 2023 at 3.25%. Sectors hurt by rising rates in 2022 may benefit in 2023.
BlackRock Investment Institute
Higher yields are a gift to investors who have long been starved for income. And investors don’t have to go far up the risk spectrum to receive it. We like short-term government bonds and mortgage securities for that reason.
We are underweight nominal long-term government bonds in each scenario in this new regime. This is our strongest conviction in any scenario. We think long-term government bonds won’t play their traditional role as portfolio diversifiers due to persistent inflation. And we see investors demanding higher compensation for holding them as central banks tighten monetary policy at a time of record debt levels.
We see long-term drivers of the new regime such as aging workforces keeping inflation above pre-pandemic levels. We stay overweight inflation-linked bonds on both a tactical and strategic horizon as a result.
Citi
The hurdle for the Fed to pause is obviously lower than for the Fed to cut. And duration will trade well when the Fed is almost done hiking. Cuts will not be required. As such we are closer to buying bonds than buying equities. But for now we remain neutral on US rates, and instead buy in EM.
We prefer EM rates because there are several central banks that are already or almost done hiking, and will eventually cut, which is the sweet spot in the cycle. While US rates are still going up, this is a “B trade”, rather than an “A trade”.
Our only rates underweights are in the European periphery, where we express the increase in supply / QT view. We also remain underweight France against Germany for similar reasons.
Our quant corner finds macro-economic conditions in stagflationary territory and is bearish risky assets. Using our economic forecasts, next year could be brighter, as inflation is likely peaking and central bank hiking cycles more mature, setting the stage for overweights in credit and bonds.
Ahead of the expected recession, we are committed to selectivity and quality. This begins with fixed income, which we believe offers genuine portfolio value now for the first time in several years. Short-duration US Treasuries present a compelling alternative to holding cash. For US investors, municipal bonds also seek better risk-adjusted after-tax returns.
The dollar could continue rallying for longer than fundamentals justify. Overshoots have been a characteristic of prior periods of dollar strength. Around a durable dollar peak, we will look to add more non-US equities and bonds.
Credit Suisse
With inflation likely to normalize in 2023, fixed-income assets should become more attractive to hold and offer renewed diversification benefits in portfolios. US curve “steepeners,” long-duration US government bonds (over euro zone government bonds), emerging-market hard currency debt, investment grade credit and crossovers should offer interesting opportunities in 2023. Risks for this asset class include a renewed phase of volatility in rates due to higher-than-expected inflation.
Goldman Sachs
After a sharp increase in bond yields this year, new and potentially less risky alternatives are emerging in fixed income: US investment grade corporate bonds yield almost 6%, have little refinancing risk and are relatively insulated from an economic downturn. Investors can also lock in attractive real (inflation-adjusted) yields with 10-year and 30-year Treasury inflation protected securities (TIPS) close to 1.5%.
While bonds have been especially volatile of late, there are signs that these swings are peaking. Higher yields have also reduced the duration risk (the risk that a bond’s price will fall as rates climb) for fixed-income assets at the same time that economic growth is becoming more of a concern. That all suggests that risks are piling up for the equity market next year while bonds might become less risky.
Strategists at Goldman Sachs expect yields on two- and 10-year Treasuries to rise higher before they peak in the first half of 2023.
Markets are now pricing in a more dovish Federal Reserve, signalling an expectation that the US central bank will begin lowering its funds rate by the end of next year. Our economists, by contrast, don’t expect any rate cuts in 2023. If the US economy turns out to be more resilient than anticipated and inflation stickier in 2023, stock markets and Treasuries could fall in price.
In the near term, bonds could remain more of a source of risk than of safety: policy rates could end up going higher, and staying there longer, than investors are prepared for.
With inflation still running hot, central banks are more likely to try to cool economic growth and tighten financial conditions than to boost them. And if they don’t fight inflation, there’s a risk that longer-dated bond yields will increase anyway because of rising long-term inflation expectations.
We see potential for bonds to be less positively correlated with equities later in 2023 and provide more diversification benefits. But until central banks stop hiking and inflation normalizes further, they are unlikely to be a reliable buffer for risky assets.
HSBC
In rates, we prefer US Treasuries over Bunds, and Canadian government bonds over US Treasuries. Elsewhere in DM sovereigns, we also favour Spain vs Italy and in EM prefer Mexico vs Brazil.
Bonds are the natural asset at this point in the economic and market cycle. We maintain a positive stance on the short-end of the US Treasury curve.
JPMorgan
10-year US Treasury yields are expected to fall to 3.4% by the end of 2023 and real yields are expected to decline.
Both stocks and bonds have pre-empted the macro troubles set to unfold in 2023 and look increasingly attractive, and we are more excited about bonds than we have been in over a decade.
Looking forward, it is clear that the income on offer from bonds is now far more enticing. The global government bond benchmark has seen yields rise by roughly 200 basis points since the start of the year, while high-yield bonds are again worthy of such a title with yields approaching double digits. Valuations in inflation adjusted terms also look more attractive – while the roughly 1% real yield on global government bonds may not sound particularly exciting, it is back to the highest level since the financial crisis and around long-term averages.
The potential for bonds to meaningfully support a portfolio in the most extreme negative scenarios – such as a much deeper recession than we envisage, or in the event of geopolitical tensions – is perhaps most important for multi-asset investors.
Given this uncertainty about inflation and growth, and the chunky yields available in short-dated government bonds, investors might want to spread their allocation along the fixed income curve, taking more duration than we would have advised for much of the year.
Morgan Stanley
In an environment of slow growth, lower inflation and new monetary policies, expect 2023 to have upside for bonds, defensive stocks and emerging markets.
Bonds — the biggest losers of 2022 — could be the biggest winners in 2023, as global macro trends temper inflation next year and central banks pause their rate hikes. This is particularly true for high-quality bonds, which historically have performed well after the Federal Reserve stops raising interest rates, even when a recession follows.
10-year Treasury yields will end 2023 at 3.5% vs. a 14-year high of 4.22% in October 2022.
Morgan Stanley fixed-income strategists forecast high single-digit returns through the end of 2023 in German Bunds, Italian Government bonds (BTPs) and European investment-grade bonds, as well as in Treasuries, investment-grade bonds, municipal bonds, mortgage-backed securities issued by government sponsored agencies and AAA-rated securities in the US.
Citi
We see dollar performance split next year. For the first several months, we’d expect a resumption of risk asset underperformance, likely via the earnings channel for equities. This likely keeps the dollar supported as it has a strong inverse correlation between with equities. Moving into the second half of 2023, the dollar could enter into a depreciation regime.
The dollar could continue rallying for longer than fundamentals justify. Overshoots have been a characteristic of prior periods of dollar strength. Around a durable dollar peak, we will look to add more non-US equities and bonds.
Credit Suisse
The dollar looks set to remain supported going into 2023 thanks to a hawkish US Federal Reserve and increased fears of a global recession. It should stabilize eventually and later weaken once US monetary policy becomes less aggressive and growth risks abroad stabilize. We expect emerging market currencies to remain weak in general.
HSBC
In FX, we think the yen will outperform the franc, while the Taiwanese dollar stands to underperform the Korean won.
JPMorgan
In currency markets, further dollar strength is still expected in 2023, but of a lower magnitude and different composition than in 2022. The Fed pause should give the dollar’s rise a breather. Unlike in 2022, lower-yielding currencies like the euro are expected to be more insulated as central banks pause hikes and the focus shifts to addressing slowing growth — but this in turn makes high-beta, emerging market currencies more vulnerable. Weak growth outside the US should also remain a pillar of dollar strength in 2023.
Morgan Stanley
US dollar will peak in 2022 and declines through 2023.
Bank of America
After a historically bad year for industrial metals in 2022, cyclical and secular drivers are expected to boost metals in 2023, and copper rallies approximately 20%. Recessions in key markets are a headwind but China’s reopening, a peaking dollar and especially an acceleration of renewables investment should more than offset these negative factors for copper.
Higher for longer oil prices. Russian sanctions, low oil inventories, China’s reopening, and an OPEC that’s willing to cut production in case demand weakens should keep energy prices high. Brent Crude is expected to average $100 per barrel over the course of 2023 and spike to $110 per barrel in the second half of the year.
Citi
Short copper has been our recession trade in commodities. While the Chinese reopening is a risk to the trade, our metals strategist thinks that copper is unlikely to benefit enough, given that Chinese housing may stop falling, but will not rebound much, and given the US recession. We therefore stay negative. We stay neutral in energy and gold.
Credit Suisse
In early 2023, demand for cyclical commodities may be soft, while elevated pressure in energy markets should help speed up Europe’s energy transition. Pullbacks in carbon prices could offer opportunities in the medium term, and we think the backdrop for gold should improve as policy normalization nears its end.
JPMorgan
Despite more pessimistic expectations for balances over the next few months, we find the underlying trends in the oil market supportive and expect global Brent benchmark price to average $90 per barrel in 2023 and $98 in 2024.
For base metals, 2023 will be a transitional year, with prices once again re-testing the lows approached earlier this year around mid-2023. After bottoming over mid-year, a more sustained recovery in base metals prices is set to unfold in the last few months of the year.
Relative to base metals, the outlook for precious metals is more positive, with all but palladium expected to end 2023 higher. With the Fed on pause, decreasing US real yields will drive the bullish outlook for gold and silver prices over the latter half of 2023. Gold prices are forecast to push up to an average $1,860 per troy ounce in the fourth quarter of 2023.
Morgan Stanley
Oil will outperform gold and copper, with Brent crude, the global oil benchmark, ending 2023 at $110.
BlackRock Investment Institute
We see private markets as a core holding for institutional investors. The asset class isn’t immune to macro volatility and we are broadly underweight as we think valuations could fall, suggesting better opportunities in coming years than now. Yet for strategic investors, asset classes such as infrastructure could provide a way to play into structural trends.
Citi Global Wealth Investments
In our view, 2023 will potentially be a great vintage for alternative investments. Higher interest rates have caused a repricing of private assets amid much higher borrowing costs. As such, specialist managers will be able to deploy capital into areas of distress and illiquidity.
For real estate, a higher bar is now in place for new investment across almost all markets and property types. We see this as a favourable backdrop for real estate investors in 2023.
Credit Suisse
We expect the environment for real estate to become more challenging in 2023, as the asset class faces headwinds from both higher interest rates and weaker economic growth. We favour listed over direct real estate due to more favourable valuation and continue to prefer property sectors with strong secular demand drivers such as logistics real estate.
In a more volatile 2023, we see opportunities for active management to add greater value, particularly for secondary managers, private yield alternatives and low-beta hedge fund strategies.
HSBC Asset Management
As stock and bond correlations turned positive this year, limiting the investment universe to traditional asset classes isn’t an option anymore. Indeed, some segments of alternatives will require more selectivity to reveal benefits, but the more defensive segments and true-uncorrelated asset classes such as natural capital or hedge funds can bring value to most asset allocations.
Strategies like hedge funds – particularly global macro or CTAs – continue to look like attractive diversifiers for asset allocators.