I HAVE CHEERY investment news: Most Wall Street strategists are bearish on stocks. Last week, Bloomberg reported that 2023’s projected change in the S&P 500 by the best and brightest forecasters is negative. That hasn’t happened since at least 1999. Consider today’s bleak consensus to be a contrarian indicator. It could set the bar low enough for a decent 2023.
If you flip on financial TV or peruse investment magazines at this time of year, it’s common to hear strategists predict that stocks will rise the usual 8% to 10% over the next 12 months. Nobody will scoff at or question a strategist’s bullish, but not overly optimistic, take on how markets will perform in the new year. Call it managing career risk or simply going with the herd.
As a result, you might wonder why there’s a gloomy outlook for the S&P 500 for 2023. It all has to do with the price-to-earnings (P/E) ratio on large-cap U.S. stocks. After a strong rally over the past two months, that metric is thought to be higher than normal right now.
Also driving P/Es upward is a decline in the per-share profit forecast. FactSet notes that expected 2023 earnings for the S&P 500 companies are down from more than $250 this past June to barely above $230 today. The S&P 500 closed Friday at 4071.70, so that puts the S&P stocks at a collective 18 times expected earnings. Some big banks are even calling for earnings per share to fall below $200 next year. If that dismal prognosis pans out, today’s forward P/E on the S&P 500 is an historically high 20.4.
J.P. Morgan Asset Management notes that most metrics suggest large-cap U.S. stocks are on the expensive side, but that the forward P/E is close to the 25-year average. What appears unambiguously cheap are small and mid-sized U.S. stocks and foreign shares—both of those groups have earnings multiples in the 11 to 14 range.
It’s important to keep in mind that the supposedly smartest people in the room aren’t all that smart. Your guess is as good as theirs, evidence shows. My advice: As you enjoy time with friends and family this holiday season, don’t fret too much about the dismal stock market forecasts for 2023 that you’re hearing on financial TV.
I understand that 1999 is not the same as now. It is a quite different environment from then. But the S&P500 returned -9.10%, -11.90 and -22.10 for the period 2000 thru 2002.
Mike, I like your forecast that runs cheerfully contrary to the crowd. I may resolve to start checking my account totals again after the first of the year.
Somewhere over the next 12 months the higher interest rates and the new tax on share buybacks are likely to negatively affect the earnings of some companies. Lower revenue/earnings may translate into P/E readjustment and lower stock prices. Presently, outside of the nasty bout with inflation the economy has a very low unemployment rate and most corporations had good earnings for the 3rd quarter. Eventually, the higher interest rates will take its toll.
You may indeed be right about the impact of higher interest rates on earnings. But the fallout from higher rates has already been thoroughly analyzed by investors, so wouldn’t current share prices reflect this development?
Can’t you always make that argument by the market at any point time. Isn’t that the essence of the Efficient Market Hypo.
It seems that if you are going to argue that the market overacts on the downside to enable you to time the market by adjusting your stock allocation you should also accept the possibility that the market may also sometimes underestimate future effect of the negative events.
Does it make sense to try to out guess the market by favoring foreign stocks or small caps or some other factor or simply buy total market funds?