Stock Market Predictions for 2023

Trying to predict the unpredictable

Image from Canva

Prediction is very difficult, especially if it’s about the future

- Niels Bohr

Attempting to forecast what will happen in the market in 2023 or where the market will be at the end of 2023 is an impossible venture. But a fun and helpful one to undertake.

Instead of only forecasting the price at the end of 2023, I will emulate the processFundriseCEO Ben Miller (I highly recommend his podcast "Onward") uses — forecast planning. He considers three scenarios,

• Scenario 1: Optimistic / more of the same
• Scenario 2: Pessimistic
• Scenario 3: A surprise

I will create these scenarios for several attributes of the economy that impact the market and then attempt to bring it all together for a final forecast.

For a more traditional market prediction, check out this summary ofWall Street forecasts.

Unemployment

The current unemployment rate if 3.7% and the natural rate of unemployment is around 4.5%.

Source: FRED, Federal Reserve Bank of St. Louis

• Scenario 1: The labor market stays healthy (which is good for workers and may lead to increased wage growth but may keep inflation elevated and lead the Federal Reserve to keep interest rates high), and unemployment stays below 4.5%
• Scenario 2: Unemployment increases, there are more layoffs, and the unemployment rate in 2023 ends at 6–7% (which usuallyoccurs in a recession)
• Scenario 3: The interest rates companies and banks pay on debt doubled in 2022, from ~3% to more than 6%. This leads to a liquidity crunch in 2023, causing companies to go under and even more layoffs than expected, resulting in a 9% unemployment rate

Inflation

The Fed's inflation target is 2% annual growth. Some economists and finance professionals are now calling for the target to be raised to 3% for the intermediate future. We'll see if anything transpires with that in 2023 or 2024.

• Scenario 1: Inflation has slowly declined sincepeaking in June at 9.1%and will continue to decline, ending 2023 with CPI between 3–4%

Data from BLS

• Scenario 2: The progress on the inflation battle slows, and CPI ends 2023 between 4.5–5.5%
• Scenario 3: With all the money being removed from the financial system via interest rate hikes AND the Federal Reserve reducing its balance sheet, we see inflation at 0–1% at the end of 2024. (Yes, this is a prediction for 2024 and not 2023, but this is the surprise that I see fit)

Interest Rates

While inflation and interest rates have a relationship, they do not operate in a vacuum and can be looked at independently.

• Scenario 1: The Federal Reserve raises ratesto 5% — 5.25%, which is currently their terminal rate goal, by the end of Q1 2023. They don't increase the rate any higher, and it stays at that level until the end of 2023 but would get decreased in 2024
• Scenario 2: The Federal Reserve is not satisfied with how long inflation is taking to be brought down. It raises its goal for its terminal rate, and as a result, interest rates hit a high of 5.5% — 5.75% in the summer of 2023
• Scenario 3: The Fed folds and starts to lower rates by mid-2023, and by the end of 2023, they will be 3.75% — 4%. I don't see this as likely, but we could be surprised by how the credit market performs in 2023 or other events outside the Fed's control.

Geopolitical Affairs

• Scenario 1: The Russian — Ukraine war ends in 2023, and no other countries get involved
• Scenario 2: The Russian — Ukraine war continues and escalates. More supplies are sent to aid Ukraine, and an outraged Russia decides to invade another country

Company Earning's

This is where things get very interesting. Company earnings drive stock price. We saw earnings collapse in early 2020 from lockdowns but then hit record highs in 2021, aided by a bounce back in spending.

The earnings per share of the S&P 500 is well above the historical average.  $S&P 500(.SPX)$

Data fromYCharts

For Q2 2022, the EPS of the S&P 500 was 42.7, which was still above the ten-year or five-year average. If we assume it will revert to the average, or at least move closer to it, we can expect earnings to fall.

Scenario planning for 2023 is difficult for earnings when Q4 has just finished, but the latest data is from Q2. So there is a lag between the data and the real world.

• Scenario 1: Consumers are not worried about an impending recession and keep spending. Earnings essentially stay the same, and EPS hovers around 40 most of the year
• Scenario 2: Earnings revert to the five-year average and are in the mid-30s, driven by a slowdown in B2B expenditures and consumer spending
• Scenario 3: A "surprise" scenario is difficult to imagine because I believe its highly likely earnings will decline to the mid-30s. But my surprise scenario would be that earnings revert to the ten-year average and are in the high 20s by year-end

If you jumped to the bottom to see the final market predictions, that's fine. The one takeaway I want to stress is that our concerns now will be much different than our concerns at the end of 2023 or even the middle of 2023.

At the end of 2021, we were still worried about COVID. Yet the second half of 2022, all we talked about was interest rates and the Federal Reserve.

S&P 500 Prediction

• Scenario 1: The Federal Reserve gets to its current terminal rate of 5–5.25% within the first quarter. They don't raise rates for the rest of the year. The S&P hovers around 3,800 for the first half of 2023 and then moves upward in the second half, ending 2023 around 4,100s
• Scenario 2: The Federal Reserve stays aggressive with interest rates, inflation refuses to subdue, and a handful of companies struggle leading to a slightly higher unemployment rate. The S&P goes below 2022's low, hitting 3,400, but rebounds to end the year around 3,700, slightly lower than where it ended 2022
• Scenario 3: Geopolitical tensions escalate, credit markets collapse, and many companies have layoffs driving unemployment higher than anticipated. The S&P hits a low of 3,100 during 2023 and ends the year below 3,500

Those are my predictions for 2023. But as we've seen the last several years, anything can happen to change our forecasts completely—best of luck in this new year.