Wall Street looks at 2023, sighs deeply

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Happy Thanksgiving, Americans! Rob and Ethan are observing their patriotic duty to consume their own body weight in food, so this is Katie Martin writing from London. 

Over on the sell side, it’s beginning to look a lot like year-ahead outlook season. I’ve read a heap of reports so you don’t have to. Summary: everyone loves sad, beaten-up bonds, and but not sad, beaten-up equities. This is weird, given that a recession seems a nailed-on certainty for next year. Bank of America’s investor survey shows 77 per cent expect one in the next 12 months. So you’d think this would already be baked in to stocks. Is the Street too pessimistic? Let me know what you reckon:

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The most wonderful time of the year

The race to send out the first outlook of the season was won by Morgan Stanley this year, when it grabbed the trophy on November 13. Congrats to everyone involved. Honourable mention to Goldman Sachs, whose US inflation outlook piece came out the same day.

As of this writing, Goldman wears the yellow jersey for total prognostication volume: more than 500 pages of year-ahead hoo-ha so far. The doorstop prize for longest single report to date: UBS Wealth Management, 72 pages if you count all the pictures of trees. Trees next to water. Trees next to roads. Trees covered in snow. Trees. A message of some kind?

The best bit is that the timing of all these reports leaves a good chunk of 2022 left to play out. Nothing warms the heart on a winter’s day like a bank binning its year-ahead outlooks and trade ideas before the new year starts.

On one level, of course, the whole thing is a giant waste of time. Did you have ‘Russia invades Ukraine’ or ‘massive deleveraging event by UK defined benefit pension schemes’ on your ‘things to watch’ list for 2022? No, you did not. So why am I reading them? Partly because I need to get out more. And partly because I want the answer to a vexing question: Everybody knows a recession is coming. So, are stocks ready? Will 2022 be less of a trainwreck?

Here goes:

Morgan Stanley. Nov 13; 63 pages; no pictures of trees but at least two of strategist Andrew Sheets’ trademark cartoons.

2022: How bad? This bad:

Chart of equities and bonds performances


The only people having fun in markets this year are running macro hedge funds with short rates/long dollar type positions.

The good-ish news for everyone else is, Morgan Stanley reckons the S&P 500 will end next year roughly where it is now. The bad news:

It won’t be a smooth ride. Consensus earnings are simply too high for 2023. We expect 2023 to be a rough start with a strong finish.

We remain well below the 2023 bottom-up consensus EPS forecasts for the S&P 500. We think that it’s only a matter of time before earnings estimates fall in a more accelerative fashion that reflects the kind of downside expressed in our forecasts. The question is one of timing. 

Bottom line, our more recent tactical bullish call for the S&P 500 to reach 4,000-4,150 will ultimately roll over, with the index likely making this bear market’s low in 1Q23 as 2023 earnings revisions become more severe.

UBS Wealth. Nov 17; 72 pages including trees.

On monetary tightening, yes, we may be nearly there, UBS reckons, with rate increases likely to end in the first or second quarters. Indeed, “we think inflation should be close enough to target by the end of the year for the Fed to consider rate cuts”.

The base case is: “Markets remain volatile and under pressure from inflation and rate fears, and amid weaker growth expectations. The risk-reward balance remains unfavourable, with stocks ending June 2023 around current levels.”

In other words: annoying.

UBS scenario targets

But investors probably just have to ride out this frustrating period.

We think the backdrop for risky assets should become more positive as the year progresses. This means investors with the patience and discipline to stay invested should be rewarded with time. Investors currently sheltering from volatility will need to plan when, and how, to rotate back into riskier assets over the course of 2023.

Historically markets start to turn between three and nine months prior to a trough in economic activity and corporate profits. With this in mind, a more constructive environment for risky assets should start to emerge during the year.

Goldman Sachs. Nov 21 equity strategy outlook; 30 pages. No pictures. Bits here are from a range of its reports.

Goldman is still on Team “Softish US Landing.” The problem with that is:

This central path now looks well reflected in asset markets, especially after the price action in the first half of November. But that also means that the risks on both sides of this central path are now less well-priced: plausible outcomes in which there is more inflation persistence, a slide into outright US recession, or— the baseline for many macro investors— both.

So even after a long year of worry, the market remains vulnerable to bad growth and inflation news.

In terms of asset performance, nope, not nearly there yet at all. And Pomo is the new FOMO.

The bear market is not over, in our view.

The conditions that are typically consistent with an equity trough have not yet been reached. We would expect lower valuations (consistent with recessionary outcomes), a trough in the momentum of growth deterioration, and a peak in interest rates before a sustained recovery begins.

We expect markets to transition into a ‘Hope’ phase of the next bull market at some point in 2023, but from a lower level. The initial rebound from the trough is likely to be strong, in common with the beginning of most cycles before transitioning into a ‘Post Modern Cycle’ with lower returns.

We expect overall returns between now and the end of next year to be relatively low.

A weak economy that is still deteriorating is very different from an economy that is getting less bad. Generally, history suggests that the worst time to buy equities is when growth is contracting and momentum is deteriorating, and the best time is when growth is weak but moving towards stabilisation. While we are likely to transition into the phase of improving growth momentum at some point in 2023, the nearer term looks less promising.

Our economists expect no rate cuts before 2024.

Expect to be irritated.

Credit Suisse. Nov 22, 67 (small) pages, lots of pictures of trains.

Like the others, CS is expecting a good run for bonds, and a continuing mess in equities, particularly in the first half of the year.

The environment remains challenging for equity markets, as we expect the nominal economic growth rate to slow substantially, thereby reducing revenue growth potential. Furthermore, close to record-high corporate profit margins will likely come under pressure and start to reflect various cost pressures.

Consensus earnings have already been revised materially lower, but the current estimate of 3.7% growth for 2023 may still be too optimistic, in our view.

We expect a turning point in the market to materialize in the second half of 2023. Until then, we would expect volatile but rather muted equity returns and would focus primarily on defensive sectors/regions offering stable margins, resilient earnings and low leverage.

So, again, brace for a highly annoying year.

Market analysts, we appreciate you, but this is a frankly depressing message.

One good read

Bloomberg asks the important question: Can Nigel Farage Make You Rich? (Spoiler: No.)

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