Stock market predictions 2023: what to expect


2022 will go down in history as one of the worst years for stocks in decades; what will 2023 bring to the markets?

S&P 500 Index Price History (SPX)

Which scenario suits you?

It is impossible to predict the short-term trajectory of the markets, but we can try to distinguish the trends and the upside and downside risks from these trends:

  • Baseline scenario: a mild recession in the first half of 2023, which lowers inflation, leaving the Fed to relax in the second half; the S&P 500 (SPX) rebounds from 10% to 20%.
  • Bearish case: The Fed tightens excessively, sending the economy into a “hard landing,” pushing stocks lower for the year.
  • Bullish case: The Fed succeeds in lowering inflation without causing a recession, and stocks recover as they did in 2021.

It would be reasonable to work from the baseline outlook while protecting against different scenarios that might affect some stocks more than others.

Base case: mild recession followed by recovery

In the base scenario, it would be obvious to buy tech stocks. The decades-long trend of technology entering all layers of human life will continue, and tech stocks will likely shine again.

According to Morning Star (NASDAQ: MORNING) analysts, large-cap growth stocks are now one of the cheapest segments of the market, having suffered some of the steepest declines. Meta Actions (NASDAQ: META), alphabetical (NASDAQ:GOOG), NVIDIA (NASDAQ: NVDA), Amazon (NASDAQ: AMZN), Microsoft (NASDAQ: MSFT) and Apple (NASDAQ: AAPL) suffered staggering losses in 2022 and appear to be heavily undervalued. There is no doubt that many Big Tech companies will see their stock market performance improve as the economy recovers and sentiment improves, making their current prices decent entry points.

Be sure to look beyond price to fundamentals, however. After the crazy rally and crash, investors will be much more skeptical of explosive growth promises that aren’t backed by solid numbers. When optimism returns, it will be much more realistic, at least for a while. It would therefore be wise to choose stocks of companies with strong earnings, abundant liquidity and solid growth prospects.

Also, take a look at another very cheap stock segment: small caps. These stocks suffer from downturns, but tend to outperform when the economy improves. Small cap P/E ratios have hit two-decade lows, and the recession already appears to be priced into their valuations.

To take advantage of this, you can take a look at the actions of Sarepta Therapeutics (NASDAQ: SRPT), Shockwave Medical (NASDAQ: SWAV), lattice semiconductor (NASDAQ: LSCC), pure storage (New York Stock Exchange: PSTG), Tetra Tech (NASDAQ: TTEK), or WillScot Mobile Mini Holdings (NASDAQ: WSC), as they look promising.

Downside case: bad recession or high rates for longer

If you think 2023 could prove to be another “risk-free” year but still want to stay invested, consider choosing stocks of companies that aren’t reliant on cheap funding and are backed by abundant liquidity, solid business models and a dominant position. in their markets. Companies paying dividends are preferred; value stocks will likely outperform in this environment. Pay attention to industries: Discretionary products and services are much more affected by recessions than those that provide basic necessities.

For example, Kraft Heinz (NASDAQ: KHC) is a leader in the packaged food market. It has substantial pricing power and pays stable dividends, which could help hedge against an economic downturn. Western Oil (NYSE: OXY) has been an excellent hedge against inflation, trading at a P/E ratio of 5.2. Target (NYSE: TGT) is a dividend kingpin with a strong market capitalization and solid profitability. Another high-dividend stock is Danaher (New York Stock Exchange: DHR), a stable and diversified conglomerate. Johnson & Johnson (NYSE: JNJ) has plenty of cash, a high dividend yield and a large market share. Top of this list with Berkshire Hathaway (NYSE: BRK.B), the best-run financial conglomerate in the United States, and you should be well equipped for a recession.

Bullish case: no recession, market rally

If you think the US economy will avoid a recession, you think you have to buy everything at these prices, don’t you? Well, no: it will take time for another large buy-all rally to emerge; investors will be very selective for some time, only putting money into companies that have established business models and resilient financials.

Go for the “core” portfolio, adding stocks from sectors that benefit from higher growth, basing your choice on reasonable stock valuations and good fundamentals. Consider adding technology and discretionary stocks to the portfolio, such as Sally Beauty (NYSE: SBH), trading at a P/E ratio of 7.5, Century Communities (NYSE: CCS) at 2.8, Green Brick Partners (NYSE: GRBK) to 3.99, Western Digital (NASDAQ: WDC) to 10.5, Stride (NYSE: LRN) to 15.0, Applied Materials (NASDAQ: AMAT) to 12.8, and ON Semiconductor (NASDAQ: ENABLED) to 16.2.

The takeaway: hang on

Whatever happens in 2023, remember: every bear market ended with a new bull market. Protect your wallet to ride out turbulence and don’t lose your cool.

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Disclosure

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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