Stocks slipped this morning to cap off a rotten, no-good year for bulls. The Dow, S&P, and Nasdaq Composite all fell while yields continued climbing. The 10-year Treasury yield jumped back up to 3.88%, matching a 49-day high set on Wednesday as the S&P endured its worst year since 2008.
Rate hikes – or, more accurately, anticipated rate hikes – controlled markets in 2022. And though inflation seemingly peaked earlier this year, the Fed hasn’t shifted dovish at all.
Instead, Fed Chairman Jerome Powell has only grown more hawkish over time, reiterating that until inflation (+7.1%) gets closer to target (+2.0%), rates will remain elevated. That was confirmed at the Fed’s December meeting when the FOMC raised its median rate for next year to 5.1%, up from 4.6% in September.
That dealt a major blow to bulls who were hoping that the Fed would finally start cutting rates sometime in H2 2023. But even if the Fed does bring rates lower as previously expected, we’re still at least half a year away from a rate reduction.
More imminently pressing to markets is the upcoming earnings season, which could result in some serious “belt-tightening” by shareholders.
“We’re sort of stuck in neutral right now because there are more unanswered questions than there are known entities […] We’ve got a lot riding on this coming earnings season when we think about the pressures that are going to exist on margins,” said Riverfront Investment Group strategist Rebecca Felton.
“There are a lot of questions as we head into the new year, but we certainly will be happy to see 2022 go over.”
On the topic of earnings, Fundstrat founder Tom Lee said that an earnings recovery in 2024 could fuel a major equity rally into the end of 2023.
“The question we have to ask in 2023 is what is the probability the market has an above-average year,” Lee said.
“If 2023 is a year where earnings are declining, but they rebound in 2024, well markets begin to look through that. In fact, on average, stocks bottom before earnings estimates bottom.”
Fundstrat currently has a year-end price target of 4,750 for the S&P 500. That’s the highest on Wall Street by far, but it also shouldn’t come as much of a surprise. Lee is unequivocally Wall Street’s biggest (and most vocal) bull.
He famously predicted a $20,000 Bitcoin prior to its massive runup in 2017. Similarly, he told investors to expect an explosive rally after the Fed started QE in response to the Covid pandemic.
And he was right in both cases.
2022 was a different story. Lee gave the S&P a year-end target of 5,100. The index is set to close trading this year at 3,800, well below the Fundstrat estimate. Will Lee be wrong again in 2023? It seems that way considering how much uncertainty investors still face.
That being said, if the Fed does truly cut rates in June (likely after raising its target rate for inflation) stocks will explode higher heading into the second half of next year, potentially passing 4,750 on the way up.
It all depends on the Fed’s plan for 2023. Nobody knows for sure what that will be, though, and until the market gains more clarity in that regard, the longer-term bear market will push stocks lower.