Wall Street stock market predictions for 2022 were the most off since 2008: will next year be any different?

Wall Street is often wrong when it comes to anticipating where stocks might be trading a year from now. But in 2022, forecasters would miss the mark by the widest margin in nearly 15 years, according to data compiled by FactSet.

On Tuesday, Wall Street equities analysts were poised to overestimate the S&P 500 index’s performance by nearly 40% in 2022, according to the average bottom-up forecast prepared by FactSet’s senior earnings analyst John Butters. That would be its biggest failure since 2008, when analysts overshot by 92%.

A year ago, according to FactSet data, equity analysts valued the S&P 500 SPX at +1.38% at the end of 2022 at 5,264.51 points. That was far off base: the large-cap index was trading just north of 3,800 at Tuesday’s close.

This year, however, Wall Street’s top strategists have been more cautious, spent much of the time trimming their year-end stock market targets while the Federal Reserve continued to hike interest rates to fight stubbornly high inflation and explode volatility in markets including stocks, bonds, currencies and commodities.

The damage being felt in financial markets has caused the S&P 500 to fall about 20%, according to Dow Jones Market Data, making for its worst year since 2008, when it plunged nearly 40%.

S&P 500 estimates

A recent MarketWatch poll of top Wall Street forecasts put the S&P 500’s median estimate for the end of 2023 at 4,031, up just about 6% from Tuesday’s close of 3,821.62. To arrive at this average (see chart), MarketWatch collected estimates from 18 investment banks and brokers.

Some estimates including those from top equity and macro strategists Barclays PLC BCS, +1.03%, Morgan Stanley MS, +2.22%, Citigroup Inc. C, +2.36% and UBS Group AG UBS, + 3.05% expect the S&P 500 to be ready next year under 4,000.

However, the group’s forecasts are spread over an unusually wide range, market strategists told MarketWatch.

On the lower end, BNP Paribas’ Greg Boutle expects stock prices to continue falling next year, with the S&P 500 ending 2023 at 3,400 points. Deutsche Bank’s Binky Chadha, who has the group’s highest year-end target, expects the index to end at 4,500 next year.

Additionally, a FactSet poll of equity analysts gave a bottom-up forecast for the S&P 500 of 4,500 by the end of 2023. That would represent an increase of about 18% based on the index’s close on Tuesday.

What about a recession?

Many macro strategists said in their forecasts for 2023 that they expect the US economy to slide into recession by mid-year, further eroding stock valuations as corporate earnings tumble and unemployment rises.

In particular, Goldman Sachs chief economist, +1.81%, Jan Hatzius expects US economic growth to slow but avoid a recession.

One of the main pillars of stock valuations has been the expectation that stocks will bottom in the first half of next year before recovering in the second half of 2023 when inflation falls and unemployment rises, allowing the Fed to do so to lower interest rates without risking hyperinflation.

While even Fed Chair Jerome Powell has said there are no guarantees as to where specifically monetary policy should cut inflation, There is an ongoing expectation that the Fed will “back off” from its aggressive interest rate policy sometime next year, which has helped support equities.

Movements in fed funds futures, used by traders for hedging and speculation purposes, appear to confirm this view, according to data from CME Group’s FedWatch tool.

Investors continue to cling to hopes of a Fed rate cut later in 2023, futures show, even as the Fed’s latest “dot plot” released earlier this month suggests senior central bankers are not coping expect to cut rates before 2024.

Many investors expect stocks to bottom in the first half of 2023 as the Fed’s aggressive rate hikes finally take their toll on the economy.

JPMorgan Chase & Co.’s JPM, +1.31% Marko Kolanovic, one of Wall Street’s most optimistic strategists heading into 2022, shares that view, he confirmed to MarketWatch via email.

Morgan Stanley’s Michael Wilson, one of the few Wall Street stock strategists to predict this year’s crash, took a similar view when he described 2023 as a “two-half story” in a Dec. 19 research note. Wilson believes the S&P 500 will find a bottom in the first quarter of 2023, creating an “excellent buying opportunity.”

Bulls and bears: completely different perspectives

A look outside of the big investment banks reveals bulls and bears with dramatically different visions of what to expect in the year ahead.

Tom Lee, head of research at Fundstrat Global Advisors, expects the S&P 500 to rise to 4,750 next year as he expects inflation to continue to fall. Lee has maintained his reputation as a stock market bull by making frequent appearances on business television networks such as CNBC and standing by his calls for stock prices to continue to rise.

In a recent elaboration of his 2023 outlook, Lee noted that instances when US stocks fall for two consecutive years have been rare since World War II.

Furthermore, double-digit falls in prices that seem likely this year have often been followed by particularly sharp rallies, historical data shows.

According to Lee’s analysis of historical data going back to 1946, the S&P 500 has risen an average of 13.5% in the years following a pullback.

FUND STRATEGY

On the downside, stock market bears like Chris Senyek, chief investment strategist at Wolfe Research, expect the pain in stocks to continue next year. In a recent report, Senyek explained why he believes the US economy will slump over the next year while inflation will remain stubborn and lead to “stagflation”.

A 35% pullback?

As a result, Senyek expects the S&P 500 to potentially fall as much as 35% over the next year. A drop of that magnitude from Tuesday’s close would send the S&P 500 to around 2,500. a level last touched after the March 2020 crash, according to FactSet.

“We believe that the amount of [monetary] The tightening already done is enough to push the US economy into recession and US real GDP growth is set to hit -2% to -3% on Jan 1st [year-over-year] Base sometime in 2023,” Senyek said in a note.

The S&P 500 is down about 20% this year through Tuesday, while the Dow Jones Industrial Average DJIA is down 10% at +1.47% and the Nasdaq Composite COMP is down nearly 33% at +3.66%.