Despite a parade of Wall Street recession predictions this year, Goldman Sachs strategists still believe a “soft landing” is likely.
But that doesn’t mean stock market investors should celebrate.
The 153-year-old investment bank’s equity research team, led by chief US equity strategist David Kostin, said this week that it believes the S&P 500 will fall about 10% to 3,600 over the next three months. as interest rates rise.
After that, Kostin and his team argued that the blue-chip index will end in 2023 at 4,000, roughly the same level it closed at today.
His argument is based on the idea that the Federal Reserve’s battle against inflation will end in May of next year, helping to propel stock prices from their lows even as global economic growth stagnates.
The Fed raised rates six times this year to combat inflation not seen since the early 1980s. In October, the results of its work began to show when year-over-year inflation, as measured by the consumer price index ( CPI), fell to 7.7%, a significant drop from its June peak of 9.1%.
“Our economists expect that by early 2023 it will become clear that inflation is slowing and that the Fed will reduce the magnitude of the increases and eventually stop tightening,” Kostin wrote in a research note Monday.
But at the same time, with a lack of corporate earnings growth on the horizon and corporate profit margins under pressure, Kostin and his team said they “expect less pain but no gain” for stocks in 2023.
And they warned that there is a key risk to their flat-year thesis for stocks: a recession.
“[A] flat return under our base case and [a] a large downside in a recession means investors need to remain cautious,” they wrote.
A ‘distinct risk’
Here are the facts. About 98% of CEOs expect a recession within 18 months and 72% of economists surveyed by the National Association for Business Economics expect a recession within the next year. In the meantime, 75% of voters I think we’re already in a recession, and billionaires like Elon Musk agree.
Despite this, Goldman Sachs believes the US economy is strong enough to weather the storm, even if its analysts concede that a severe economic downturn “remains a clear risk.”
If a recession hits, Kostin and his team argue that corporate profits would fall 11% next year. For the S&P 500, that would mean a drop to 3,150 (-22%) at the trough of the recession.
When is that low point? Kostin and his team did not make that forecast, but argued that when economic growth data is at its worst, markets often bottom out.
They noted, for example, that in the 12 recessions since World War II, the S&P 500 has “often” bottomed out within months of the cycle low of the ISM Manufacturing Index, which is a proxy for economic activity in the sector. manufacturer. .
Finally, Kostin and his team noted that there will be less appetite for shares next year due to the reduced number of corporate buybacks, as well as less share buying among retail investors, which could affect share prices.
“Buybacks have been the largest and most consistent source of demand for shares for more than 10 years, but demand will weaken in 2023,” they wrote, forecasting a 10% year-over-year decline in corporate buybacks.
Goldman also expects households to be net sellers of shares for the first time since 2018 next year, with estimated outflows of $100 billion.
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