Goldman Sachs strategists say the bear market will continue in 2023

(Bloomberg) – Stock investors hoping for a better 2023 will be disappointed, according to strategists at Goldman Sachs Group Inc., who said the bear market is not over yet.

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“The conditions that are typically consistent with a stock trough have not yet been reached,” strategists such as Peter Oppenheimer and Sharon Bell wrote in a statement on Monday. They said a spike in interest rates and lower valuations reflecting the recession were needed before a sustained recovery in stock markets could occur.

Strategists estimate the S&P 500 will end 2023 at 4,000 index points — just 0.9% higher than Friday’s close — while Europe’s benchmark Stoxx Europe 600 will end next year about 4% higher at 450 index points. Barclays Plc strategists, led by Emmanuel Cau, have the same goal for European gauge and said getting there will be “difficult”.

The comments come after a recent rally – fueled by weaker US inflation data and news of China’s easing of Covid restrictions – which saw several global indices enter bullish technical levels. The strong rebound since mid-October followed a turbulent year for global markets as central banks aggressively hiked interest rates to curb rising inflation, fueling fears of a recession.

Goldman strategists said the gains are not sustainable because stocks don’t typically recover from lows until the rate of deterioration in economic and earnings growth slows. “The short-term path for stock markets is likely to be volatile and bearish,” they said.

The view echoes that of Morgan Stanley’s Michael Wilson, who reiterated today that US stocks will end 2023 almost unchanged from current levels and will face a bumpy road there, including a big pullback in the first quarter.

According to his statement Monday, Wilson’s clients have contested his view that the S&P 500 would fall as low as 3,000 points in the first three months of next year — a 24% loss from Friday’s close. “What has yet to be priced in is earnings risk, and that will ultimately serve as a catalyst for the market to make new price lows,” he said.

Still, strategists are divided on the fate of stocks after a volatile 2022.

“Three double-digit rallies this year in the S&P 500 suggest that as difficult as 2022 has been for stock markets, there is enough resilience to suggest this year could be a harbinger of better times,” said John Stoltzfus, chief investment strategist at Oppenheimer Asset Management, wrote in a statement on Monday.

Meanwhile, strategists at Goldman expect Asian equities to outperform next year, with the MSCI Asia-Pacific ex-Japan ending the year 11% higher at 550 points. Her colleagues at Citigroup Inc. were more bullish on Chinese stocks today, saying Beijing’s focus on Covid Zero and real estate should boost earnings.

With the bear market still in full swing for now, Oppenheimer and his team recommended focusing on quality companies with strong balance sheets and stable margins, as well as high value companies and energy and resource stocks where valuation risks are limited.

(Updates with comments from Oppenheimer AM in paragraphs 9 and 11)

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