2023 does not look like it will be a different year than 2022 according to Blackrock. Which has signaled that Wall Street market valuations are not reflecting the damage that is coming in the next 365 days, according to Brian Sozzi at Yahoo Finance.
The bank noted that it “will turn positive on shares when it believes that valuations fully reflect the damage on the horizon.”
One of the lead authors of the report, strategist Wei Li, told Yahoo Finance Live that investors should be on high alert for several factors that could send the S&P 500 back to October lows of around 3,600.
“We don’t see rate cut cycles starting next year,” Li said of a factor that could destabilize stocks in 2023. “In fact, we see them starting in 2024, but even then, it’s more dovish than what the markets are valuing”.
Li also noted that earnings estimates for companies remain too high given BlackRock’s vision of a modest recession next year.
“We see the US stock market in terms of EPS growth next year at -6%, and that’s in contrast to current consensus and market prices, so we’d lean against stocks rallying.” we saw at various times, including just this month,” Li added.
To be sure, the market is likely to enter 2023 on a weak footing.
Shares fell again on Thursday after the weak quarter and outlook for chip giant Micron triggered more economic worries.
In December alone, the S&P 500, Dow Jones, and Nasdaq fell more than 5%, 3%, and 7%, respectively.
Selling pressure in the markets has returned after the Fed raised interest rates by 50 basis points at its last policy meeting earlier this month, pushing the benchmark rate to the highest level since 2007. The central bank also surprised market watchers in two more ways.
First, the Fed’s updated economic forecasts showed that officials expect rates to peak at 5.1% in 2023. That’s an additional 50 basis points higher than what they predicted in September.
Second, Fed Chairman Jerome Powell was more aggressive than some expected regarding the central bank’s policy path.
Weak readings this month on retail sales and consumer confidence have not helped market sentiment either.
Li and his team believe now may be a good time for investors to start turning to bonds.
“The difference from the beginning of this year when we look at the beginning of next year is that the revenue is finally flat again,” Li said. “You’re getting paid very well on the short end of the government bond market. You’re getting paid over 4% without taking duration or credit risk. And for high-quality credit, you’re getting paid over 6% without taking a lot of downtime risk.” duration or also. Frankly, a lot of credit risk that we think is very, very attractive.”
Blackrock closed the session on Thursday at $703.65 and the moving averages of 70 and 200 periods remain below the price. Meanwhile, Ei indicators are mixed.