This week, two of Wall Street’s top equities analysts placed their bets on markets for the first half of 2023, and in no uncertain terms, both analysts expect the first six months of 2023 to offer significant downside. On Tuesday, Mike Wilson, Morgan Stanley’s Chief Equity Strategist and Chief Investment Officer said he believed the S&P 500 could drop as much as 24% from Tuesday’s close in “early” 2023. On Wednesday, Marko Kolanovic, J.P.Morgan’s Global Head of Macro Quantitative and Derivatives Research, said he believed the equity markets would revisit their 2022 lows, most likely in Q1 2023.
Per Wilson, “You should expect an S&P between 3,000 and 3,300 some time in probably the first four months of the year,” he said. “That’s when we think the de-acceleration on the revisions on the earnings side will kind of reach its crescendo.”
Per Kolanovic, “We believe that 1) previous lows in equity markets are likely to be re-tested as there may be a significant decline in corporate earnings, at a time of higher interest rates (implying lower P/Es and lower prices relative to the 2022 lows); and 2) we are inclined to think that this market decline could happen between now and the end of the first quarter of 2023.”
Wilson and Kolanovic are essentially saying the same thing, which tends to be the case when the largest investment banks put out their top analysts to make market predictions. It provides the large investment banks CYA protection just in case the predictions go wrong – “well, he said it too!” However, the reasoning behind the 2023 market bets – that the Federal Reserve’s quantitative tightening has yet to meaningfully impact corporate earnings because the lag of QT’s effect on the consumer has yet to materialize in full force – has validity, if for no other reason than it’s entirely consistent with capital markets sentiment throughout the financial services world, and corporate sentiment, both public and private.
But there are less subjective, recent developments which back-up Wilson’s and Kolanovic’s market bets for 2023.
Here are two of them.
In the same CNBC interview which I wrote of last week featuring outgoing Visa CEO, Al Kelly, Al offered some insightful commentary based on the unique visibility that Visa has into the consumer. Notably, that consumer spend, which Visa sees in gross payments volume, is transitioning away from premium retail and toward discount and value retail. The implication being that from Visa’s perspective, consumer spend is stable – at least nominally, as inflationary pressures to pricing can’t be teased-out – but the “quality” of spend is shifting to value, thus suggesting consumers are tightening their wallets. .
The second development came on Friday with the Labor Department’s monthly jobs report. It showed November payrolls increasing well above what economists forecasted – 265k versus 200k – and average hourly earnings up 60 bps, which was twice as much as predicted. With the Fed stating explicitly that its tightening efforts are targeted towards easing the labor market, both of these data points suggest that the Fed’s actions, at least to date, haven’t had the desired effect, thus increasing the probability that even if the Fed slows down its rate of interest rate hikes – going from 75 bps to 50 bps – the economy will likely have to deal with these elevated levels for longer than previously expected.