Goldman’s forecast for stocks over the next 3 months isn’t great – and investors should expect ‘less pain but no gain’ next year

Despite a parade of recession predictions from Wall Street this year, Goldman Sachs strategists still believe a “soft landing” is likely.

But that doesn’t mean stock market investors should celebrate.

The 153-year-old investment bank’s equity research team, led by chief US equity strategist David Kostin, said this week it believes the S&P 500 will fall about 10% to 3600 over the next three months as interest rates will rise.

After that, Kostin and his team made the case that the blue-chip index will end 2023 at 4000 – about the same level it closed today.

Their argument is based on the idea that the Federal Reserve’s inflation battle will end by May of next year, which will help boost equity prices from their lows even as global economic growth stalls.

The Fed has raised rates six times this year to combat inflation not seen since the early 1980s. In October, the results of his work began to show when year-on-year inflation, as measured by the consumer price index (CPI), fell to 7.7%, a significant drop from its peak of 9.1% in June.

“Our economists expect it to become clear in early 2023 that inflation is accelerating and that the Fed will reduce the amount of hikes and cease tightening,” Kostin wrote in a research note on Monday.

But at the same time, with a lack of corporate earnings growth on the horizon and the company’s profit margins under pressure, Kostin and his team said they “expect less pain but also no gain” for stocks in 2023.

And they warned that there is one main risk to the flat year for the stock thesis – a recession.

“[A] fair return under our coin case and [a] “Severe downside in a recession means investors should be cautious,” they wrote.

‘particular risk’

Here are the facts. About 98% of CEOs expect a recession within 18 months and 72% of economists polled by the National Association for Business Economics expect a recession within the next year. Meanwhile, 75% of voters believe we are already in a recession—and billionaires like Elon Musk agree.

Despite this, Goldman Sachs believes that the US economy is strong enough to weather the storm, even if its analysts admit that an economic downturn “is always a distinct risk.”

If a recession hits, Kostin and his team argue that corporate earnings would fall 11% next year. For the S&P 500, that would mean a fall to 3150 (-22%) at the low point of the recession.

When is that low point? Kostin and his team did not make that forecast but argued that when economic growth data is at its worst, markets usually rally.

They noted, for example, that in the 12 recessions since World War II, the S&P 500 has “often” bottomed out within a few months of a cycle low in the ISM Manufacturing Index, which is a measure of economic activity in the manufacturing sector. .

Finally, Kostin and his team noted that there will be less appetite for stocks next year due to a reduced number of corporate buyouts, as well as fewer stock purchases among retail investors, which could hurt share prices. .

“Repurchases have been the largest and most consistent source of demand for shares for over 10 years but demand will decline in 2023,” they wrote, predicting a 10% year-over-year decline in corporate buybacks.

Goldman also expects households to be net sellers of stocks for the first time since 2018 next year, with estimated outflows of $100 billion.

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