You could add exogenous factors like economic crisis in China, natural gas crisis in Europe, escalations with Russia, N. Korea, etc., but the main reasons why I believe stocks will be lower through June is represented by the formula.<\/p>\n\n\n\n
In my opinion, earnings are going to fall dramatically. While some analysts are still forecasting $220 in EPS on the S&P 500, I believe the number will be closer to $196. I think the Fed is also going to continue to hike rates through Q1 towards approximately 500 basis points of tightening. Lending standards are more restrictive and demand for debt is falling given the elevated rates. Tight credit conditions historically lead to corrections in equities. The Negative Wealth Effect impacts consumer spending as people feel less confident about the economy when their major assets: homes and 401k\u2019s, decline. Consumer spending has held up to this point but I expect to see that rollover in the first half of 2023.<\/p>\n\n\n\n
Virtually every macroeconomic data point, with the exception of consumer spending, suggests the economy is currently contracting and a recession likely. Composite PMI, one of the best leading indicators, is a 45 and heading lower suggesting contraction in the manufacturing sector. Services PMI is also in contraction territory and the Leading Economic Indicators published by the Conference Board is dismal. A deeply inverted yield curve negatively impacts earnings of financials that compromise 12% of the S&P 500. Higher corporate borrowing costs combined with recent tax hikes are strong headwinds for earnings.<\/p>\n\n\n\n The situation might not be as dire as the data suggests when forecasting market performance in 2023 as there are positive signs on the horizon. First, it is likely the Fed will be done with rate hikes at the end of Q1 and markets are pricing in Fed rate cuts by the summer. Enough damage will likely have been done to the economy and labor markets that inflation will be under control. The Fed should also come to the conclusion that inflation has become a necessary evil. Higher interest rates raise the cost of corporate borrowing and reduce corporate profits resulting in lower tax receipts by the government. Fed tightening also hurts the markets and tax revenues from capital gains are being slashed. Prolonged high interest rates drive up the cost of servicing government debt and ultimately reduce the revenues of the government. The combination could result in a rapidly depreciating dollar and bigger inflation problem.<\/p>\n\n\n\n I expect the markets to bottom from this cycle during the summer and rebound strongly in Q3 and Q4. Energy and healthcare should continue to lead sectors during the first half of the year, but leadership will likely shift to information technology, financials and consumer durables in the 2nd half of 2023. If Rip Van Winkle took a nap on January 1 and did not wake until December 31st, he would likely look at the markets and yawn thinking, \u201cnothing to see here.\u201d For investors who are awake during that period, the volatility and stomach churning might be much greater.<\/p>\n\n\n\n —<\/p>\n\n\n\n![\"Fed](\"\/campus\/wp-content\/uploads\/sites\/2\/2023\/02\/Picture1-1.jpg\")
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