A rally for China stocks, following a few tweaks in the government’s unpopular and, to some, ineffective, zero-COVID policies, doesn’t seem to be doing a ton for Wall Street on Tuesday.
Stocks are flat, perhaps overshadowed by pivot hopes’ having been put on ice, after New York Fed President James Bullard said in an interview with MarketWatch that markets have underestimated how aggressive the central bank needs to be to get inflation under control.
MarketWatch Live: U.S. stocks edge lower at opening bell even as fear over COVID in China attenuates
Read: It’s wishful thinking that stocks will soar before the Fed pivots to lower rates
Guessing at Fed moves will be among the many tasks and challenges facing investors in 2023, according to the crystal-ball gazing we’ve seen thus far. Deutsche Bank said Monday that a U.S. recession next year will pummel stocks, though they see a recovery likely by the end of 2023.
But maybe don’t get too carried away by the word recovery. Goldman sees a “hope” phase kicking in next year, but the S&P 500 finishing around 4,000, while Morgan Stanley expects a “terrific” first quarter buying opportunity, but a finish at 3,900. Both end goal posts are not far off where we are currently.
Our call of the day comes from Bank of America, which tosses its own forecasts into the ring, as they mix worries with encouragement about keeping an eye on the long-term prize.
“Focus on the marathon, not the sprint,” said a team led by Savita Subramanian, head of U.S. equity & quantitative strategy. Their 2023-end target is also 4,000, with a bear case of 3,000, as they say near-term pain from company earnings should be expected.
BofA’s S&P 500 earnings per share forecast is $200, a number 15% below other Wall Street estimates. And returns ahead of earnings revision troughs have often been “deeply negative,” cautions Subramanian.
“But the best phase is that which follows — low but rising earnings revisions ratios. The market typically bottoms six months before the end of a recession, so buy in 1H based on our economists forecast of the recession ending by 3Q 2023,” she said. Their bull case for the S&P 500 is 4,600, based on the contrarian signal of a very bearish Wall Street.
What to own? While “2022 was all about the Fed, 2023 is about the real economy. Own quality, income, reshoring, green and brown [renewables and fossil fuels], small-caps,” is Bofa’s key advice. Cyclical factors, such as slower growth, are part of the reason investors need to seek out quality stocks.
She advises focusing on income and defense, saying if bonds do well, utilities will follow, and have lifted their view on the sector to overweight. Healthcare was cut to marketweight on risk of crowding by investors, while communication services “appears to be a value trap.” They cut tech to underweight owing to cyclicality and de-globalization risks.
The key risks ahead for BofA lie in that old cliché “it is different this time.” They see liquidity risk in “odd places” — the S&P 500 (“the most crowded ticker in the world”) and Treasury bonds, unprecedented public sector debt and polarized polities ahead, along with sticky, high inflation. The silver lining to that debt is that companies look far better capitalized than in prior recessions.
They are also worried about a “wealth effect on steroids,” noting that the $22 trillion lost in equities, bonds, cryptocurrency and real estate this year would equal a $700 billion hit to consumption, “which represents about 4% of total current consumption, plus or minus.”
BofA lays out its recession worries, clearly: “Since COVID idiosyncratic risk in the market has dropped, and average pair-wise stock correlations surged in 2022. The biggest rate shock in history, the most aggressive hiking cycle, the biggest inflationary pressure in 40+ years, rising recession fears, wartime and ongoing geopolitical risks, urgency building around carbon emission reduction suggest macro will loom large in 2023,” they said.
The bright side? BofA wants investors to look past the near term and into what could be a much brighter future ahead. “Our 10-year valuation model suggests that even if you buy today, you will enjoy [roughly] 5% price returns…pushing the S&P 500 to 6,000 by 2,032,” said Subramanian and the team.
Stocks SPX,
Read: Energy stocks look ‘especially vulnerable’ to crude-oil selloff
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Protests died down across China overnight, with heavy police presence and some university students sent home. Markets got a lift after a meeting by China’s National Health Commission announced plans to get more elderly vaccinated and shorten time between boosters.
The S&P Case-Shiller survey of the U.S.’s top 20 housing markets showed house prices declining in September. A reading on consumer confidence is due at 10 a.m. Eastern.
There’s a smattering of deal news. Royal Bank of Canada RY,
A record-breaking $11 billion was spent on Cyber Monday, said Adobe ADBE,
Just hours after filing for Chapter 11 bankruptcy, cryptocurrency lender BlockFi reportedly filed a lawsuit against a holding company by FTX founder Sam Bankman-Fried over his Robinhood shares HOOD,
President Joe Biden has asked Congress to intervene over a railroad strike ahead of next month’s deadline in stalled contract talks.
Political tension is running high the Qatar air ahead of a pivotal World Cup match between Iran and the U.S.
Read: Qatar World Cup: How much prize money is at stake?
France is bringing back working horses to fight climate change
More than a game. An American and an Iranian fan talk about opportunities for “better bonds”
A pattern repeats in Kherson, Ukraine: Russians retreat, leaving evidence of war crimes.
These were the top-searched tickers on MarketWatch as of 6 a.m. Eastern:
How Qatar found and trained up some “ultra fans”.
Actor Will Smith blames “bottled” rage for slapping comedian Chris Rock earlier this year.
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Investors have lost an estimated $22 trillion in equities, bonds, cryptocurrencies and real estate, which could mean a $700 billion hit to consumption, and maybe more, says Bank of America.
Barbara Kollmeyer is based in Madrid, where she leads MarketWatch’s pre-markets coverage of financial markets and writes the Need to Know column. She has worked in London and Los Angeles for MarketWatch previously. Follow her on Twitter @bkollmeyer.
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