Investment Banks Predict Market Trends for 2023

As the stock market opening bell rang for the first time in 2023, many investors and industry experts are looking ahead to the next year and trying to predict what markets will look like.

Investment banks play a crucial role in this forecasting, as they use their expertise and resources to analyze market trends and provide guidance to clients.

Below, we will explore how the top investment banks see markets shaping up in 2023 and what factors they are considering in their predictions. So let’s take a closer look at how investment banks view the markets in 2023.

Goldman Sachs Macro Outlook 2023: This Cycle is Different:

Global growth slowed in 2022 due to a variety of factors, including fiscal and monetary tightening, China’s Covid restrictions and property slump, and the Russia-Ukraine war. It is expected that global growth will be just 1.8% in 2023, with the US showing resilience in contrast to a European recession and a slower reopening in China. In the US, core PCE inflation is expected to slow from 5% to 3% by late 2023, with a slight increase in the unemployment rate.

The Federal Reserve is expected to continue hiking rates, reaching a peak of 5-5.25%, in order to keep growth below potential and support stronger real income growth. No cuts are expected in 2023.

Meanwhile, the Euro area and the UK are likely in recession due to a real income hit from higher energy costs. However, the downturn is expected to be mild, as Europe has already managed to reduce Russian gas imports without significantly impacting activity and is expected to benefit from post-pandemic improvements. The European Central Bank is expected to continue hiking rates through May, reaching a peak of 3%.

In China, growth is predicted to be slow in the first half of the year due to caution following an April reopening but is expected to accelerate sharply in the second half due to a reopening boost. However, the long-term outlook for China remains cautious due to weakness in both demographics and productivity, as well as an ongoing slump in the property market.

In Central and Eastern Europe and Latin America, several central banks have already begun hiking rates, although none has yet achieved a soft landing. While activity has been resilient and inflation is decreasing in some countries, particularly Brazil, the region is facing challenges due to commodity exposure, high inflation, and ongoing monetary tightening.

The main economic question for 2023 is whether central banks will be able to bring down inflation without causing a recession or at least a deep recession. While there are risks to this optimistic outlook, such as persistent inflation or central banks being too slow to recognize improvements, there are also mitigating factors, including central banks slowing their hiking pace and focusing on more leading indicators of inflation.

Political and geopolitical shocks also remain a concern, as they could disrupt global supply chains and increase volatility in financial markets.

Slow Growth in 2023, But Above-Consensus on the US
Global growth slowed sharply through 2022 on a diminishing reopening boost, fiscal and monetary tightening, China’s ongoing Covid restrictions and property slump, and the energy supply shock resulting from the Russia-Ukraine war.

JP Morgan Investment Outlook 2023: A bad year for the economy, a better year for markets

Inflation has remained above central bank targets, but it is expected to moderate in 2023 as the global economy slows and supply chain pressures continue to ease. Europe has also managed to diversify its energy supply, which should help to further ease inflationary pressures. Despite this, there are concerns about the potential for a mild recession in developed economies in 2023. However, both stocks and bonds are currently looking attractive, with opportunities in climate-related stocks and emerging markets. In particular, there are opportunities in cheaper stocks that have already priced in a lot of negative news and offer dependable dividends.

One of the key factors that will impact inflation in 2023 is the state of the global economy. Housing markets are often the first to react to changes in monetary policy, and higher mortgage rates are already impacting housing demand. This is expected to lead to a decline in construction and spending on household durables, which should help to tame inflation. The key risk for Europe is its energy supply, as Russia – which previously supplied 40% of Europe’s gas – stopped the majority of its supplies this summer.

In China, the ongoing Covid-19 pandemic has presented a different set of challenges. The low vaccination rate, particularly among the elderly, and a less comprehensive hospital network, have left the Chinese authorities hesitant to move towards a ‘living with Covid’ policy. However, a prolonged lockdown is also unsustainable, so it is expected that there will be an acceleration in activity as pent-up demand is released. This normalization of the Chinese economy could significantly ease supply chain disruptions and contribute to a moderation of goods inflation.

To ensure that inflation is under control, it is also important that wage pressures ease. Central banks have previously underestimated the extent to which a tight labour market can lead to workers demanding higher pay, but there are signs that this may start to change in the coming months. Overall, it is expected that signs will emerge that inflation is responding to weakening economic activity and that central banks will be happy to pause as long as inflation is headed in the right direction.

Growth stocks still aren’t cheap by historic standards
S&P 500 valuations started 2022 not far off those seen during the dot-com bubble. However, high valuations could largely be attributed to growth stocks. Despite underperforming in 2022, these stocks are still not particularly cheap by historical standards.

Morgan Stanley 2023 Investment Outlook: Applying the Lessons of a Turbulent Year to 2023

The year 2022 was a tumultuous one, marked by a series of unprecedented events that impacted asset prices across all markets. The global economy was just beginning to recover from the pandemic while at the same time dealing with unprecedented monetary policy measures and a major land war in Europe. These events have had significant implications for economic growth, inflation, central bank policy, interest rates, credit quality, earnings, valuations, investor sentiment and other key metrics and have weighed heavily on the investment outlook for 2023.

Looking ahead to the first quarter of 2023, Morgan Stanley sees the potential for continued strength in the economy. While an inverted yield curve hints at a potential economic slowdown at some point in the future, sectoral leadership in the market suggests otherwise. Financials, industrials, and materials have all outperformed in recent months, and the broad breadth of the market is a bullish signal. Morgan Stanley believes that the economy is proving too resilient for an earnings collapse to occur in the first quarter and expect earnings to slowly drip down, frustrating market bears.

On the subject of yield curves, Morgan Stanley believes it is important to pay attention to and respect the fact that they are inverted. While yield curves are not very good at predicting when a slowdown will occur, they do indicate that it will happen at some point in the future. It is possible that the market could see weakness in the second half of 2023 following a strong first half, but this is not the consensus view.

As for the mega tech stocks, their dominance of the S&P 500 has attracted increased regulatory scrutiny, and their bolt-on acquisitions have boosted sales growth through the use of cheap debt. While their valuations are not as high as they were in 2000, the potential for regulatory pushback remains a risk to their growth.

Overall, Morgan Stanley believes that the first quarter of 2023 has the potential to build on the strengths of the fourth quarter of 2022.

BlackRock 2023 Global outlook: a new investment playbook 

The Great Moderation, a period of stability and low inflation that lasted for four decades, has come to an end. The current era, marked by greater macroeconomic and market volatility, is well underway. According to analysts, a recession is on the horizon as central banks tighten monetary policy in an attempt to control inflation. This has led to tactical underweight in developed market (DM) equities. It is expected that risk assets will become more favourable at some point in 2023, but not yet. When that time does come, it is not expected to lead to sustained bull markets like those seen in the past. This calls for a new approach to investing.

One theme for 2023 is pricing in the economic damage that is expected to occur. Equity valuations currently do not reflect the potential damage, and a positive outlook on equities will not be adopted until the damage is priced in or until there is a change in market risk sentiment.

Another theme is the need to rethink traditional bonds. Higher yields present an opportunity for income-starved investors, and short-term government bonds and mortgage securities are attractive for this reason. High-grade credit is also favoured due to its ability to compensate for recession risks. However, long-term government bonds are not expected to serve their usual purpose as portfolio diversifiers due to persistent inflation and the demand for higher compensation in the face of tightening monetary policy and record levels of debt.

Living with inflation is the third theme. Long-term factors such as aging workforces are anticipated to keep inflation above pre-pandemic levels, leading to overweight in inflation-linked bonds.

In this new regime, portfolio changes will need to be more frequent and granular in nature, focusing on sectors, regions, and sub-asset classes rather than broad exposures. It is also a regime characterized by trade-offs shaped by supply constraints, including production bottlenecks and worker shortages caused by shifts in consumer spending and aging populations. These constraints have led to high inflation despite the below-trend economic activity. Central banks are left with the difficult decision of either crushing demand to match the current production capabilities and bring inflation down to target levels or allowing demand to exceed production and risk even higher inflation.

In conclusion, the end of the Great Moderation and the onset of a new regime with persistent inflation and output volatility requires a new approach to investing. This includes pricing in expected economic damage, reevaluating the role of bonds in portfolios, and preparing for continued inflation. Central banks will not be able to rescue economies from slowing growth in this new era as they focus on controlling inflation through tight monetary policy, resulting in a recession that has been foretold.

Taming inflation would take deep recession
Getting inflation all the way back down to target – the dotted green line – would require the Fed to deal a significant blow to the economy.

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