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First Time Since 1999, Wall Street Forecasts Negative Returns for Upcoming Year

By Mike Zaccardi, CFA, CMTStock MarketsDec 07, 2022 09:30AM ET
www.investing.com/analysis/first-time-since-1999-wall-street-forecasts-negative-returns-for-upcoming-year-200633221
First Time Since 1999, Wall Street Forecasts Negative Returns for Upcoming Year
By Mike Zaccardi, CFA, CMT   |  Dec 07, 2022 09:30AM ET
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  • Professional strategists have issued their 2023 S&P 500 year-end targets, and the consensus is dour
  • With the SPX trading near 18-time next year’s EPS forecast, it is hard to call U.S. large caps a bargain
  • Bonds, while positively correlated with stocks, could still help weather equity volatility ahead

It’s that time of year on Wall Street. All of the sell-side macro outlooks are arriving in our inboxes. Various sector-weight recommendations and year-end S&P 500 price targets are worth their weight in coal (in my cynical opinion). While I find sell-side research very valuable for charts and identifying important risks, my guess is as good as theirs in terms of where markets will venture in the coming months.

What’s unusual about this go-around, though, is that for the first time since at least 1999, the average strategist’s S&P 500 forecast for the end of the upcoming year is negative. We usually don’t see that much pessimism on the street. The obvious response is to figure out why the smartest folks in the industry see lower prices ahead and not the standard fare annual returns of 8% to 10%.

A Gloomy Crowd Calling for Lower Stocks in 2023
Projected Annual Change for S&P 500
Projected Annual Change for S&P 500

Source: Bloomberg

To me, with the S&P 500 now trading about 18 times 2023 forecast earnings per share and a possible first-half economic contraction, that valuation is steep. To be fair, back at the October 13 low in stocks, a 16-forward multiple might have seemed more reasonable.

Large Caps Are Pricey, SMIDs Still Look Cheap

Forward P/E Ratios for S&P 500 Stock Price Indexes
Forward P/E Ratios for S&P 500 Stock Price Indexes

Source: Yardeni Research

Even then, though, with high-grade corporate bonds yielding above 5.8%, up more than 350 basis points from a year earlier, a 16 P/E did not seem all that cheap either. It’s important to understand that the discount rate applied to future corporate profits is often a weighted-average cost of capital that includes debt, equity, and (to a lesser extent) the yield of preferred shares.

The yield on investment-grade corporate bonds is a good proxy of the debt piece in many instances. So, by basic math, when discounting future cash flows, an 18 P/E on U.S. large caps with intermediate-term corporate debt rates still above 5%, the S&P 500 does not appear to be a big bargain in my eye.

Also concerning on the investment front, as we head into 2023, is the reality that bonds are not hedging stocks anymore. For about 25 years, when stocks zigged, bonds zagged, helping to reduce the overall volatility of a classic 60/40 stock/bond portfolio. In the last several quarters, however, the correlation has flipped positive.

Here’s where I have some good news when assessing yields today; even though equities and Treasuries might be positively correlated, that doesn’t mean you should dismiss bonds. Think of it like this: If your stock allocation is down 20% in the next year, but your fixed-income sleeve is down 1%, the two are technically positively correlated, but bonds indeed helped you weather the equity storm. With positive real yields across the term structure of Treasuries, I assert they still have a place for risk-conscious investors.

Stocks & Bonds Moving Together in 2022

Rolling 24-Month Correlation Between Stocks and Bonds
Rolling 24-Month Correlation Between Stocks and Bonds

Source: Bank of America Global Research

The Bottom Line

While not any more valuable than your guess, I happen to agree with Wall Street forecasters’ somewhat bleak view of where the S&P 500 will be at the end of 2023. There’s still opportunity, though. Bonds should offer better real returns and if we see the usual earnings recovery in 2024, the next 12 months should feature some very attractive long-term entry points for equity investors.

Disclaimer: Mike Zaccardi does not own any of the securities mentioned in this article.

First Time Since 1999, Wall Street Forecasts Negative Returns for Upcoming Year
 

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First Time Since 1999, Wall Street Forecasts Negative Returns for Upcoming Year

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Comments (9)
Jeff
Jeff Dec 08, 2022 2:35AM ET
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Good piece, last look CAPE ratio was 27.42 (Shiller fan) so my expectation is further downturn. Maybe they're correct this time?
Joseph Obrzut
jzut Dec 07, 2022 6:32PM ET
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How many times have we seen  2 down years in a row?  It could start off negative but as the comment was said it could bring up good entry points. And history has indicated that the market will eventually be higher.
Lalit Mohan Pandey
Lalit Mohan Pandey Dec 07, 2022 4:08PM ET
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The plunging response rate of various economic surveys could call into question the reliability of Fed forecasts, according to Fundstrat. Low response rates could be overstating the tightness of the labor market. "How accurate is the surge in 5 million additional job openings, when there are 1/3 fewer respondents?" Fundstrat's Tom Lee asked. An ongoing plunge in response rates for popular economic surveys could call into question the reliability of forecasts made by the Federal Reserve, according to Fundstrat.
John Lakran
John Lakran Dec 07, 2022 12:50PM ET
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Well they couldnt have been more wrong about 2022 so file this away with one possible outcome. I however think the fed will need to pivot far sooner than most to avoid a much worse recession so oniy time will tell
Peter ONeill
Peter ONeill Dec 07, 2022 12:50PM ET
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History says / proves that once the Fed does pivot - the market crashes as the Fed being forced to pivot = things have gone very wrong. So the stock market has ALWAYS fallen by 28% - 51% after the pivot -
Martijn WN
Speculeerbeer Dec 07, 2022 12:06PM ET
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So it's time to buy?
DO RS
DO RS Dec 07, 2022 11:10AM ET
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i think the bottom of the sp is 3200, once that hits im going in
Mayur Sawant
Mayur Sawant Dec 07, 2022 11:10AM ET
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3200 is not coming for atleast next 6 months
Peter ONeill
Peter ONeill Dec 07, 2022 11:10AM ET
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Most say could fall to under 3000 at some point - which I think is 100% possible in the next 6-9 months
Vic Kharadjian
Vic Kharadjian Dec 07, 2022 11:10AM ET
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Bs 18x is very low compare to over 60x in 2000 and 2009
Peter ONeill
Peter ONeill Dec 07, 2022 11:10AM ET
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It only spiked then as profits crashed under debt and lower revenue - give it 6-12 months and a lot of companies could be here
Rashmi Guram
Rashmi Guram Dec 07, 2022 11:08AM ET
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great insight
Alvin mutomboilunga
Alvin mutomboilunga Dec 07, 2022 10:08AM ET
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Dec 07, 2022 10:08AM ET
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hello!
Rolex AK
Rolex AK Dec 07, 2022 10:08AM ET
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When analysts claim sell , then buy
 
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