S&P 500 may retest lows, 2023 will be nearly flat

• According to Goldman Sachs’ equity strategist David Kostin, stocks will hit new lows this year and returns will be near flat in 2023.
• The S&P 500 could reach 3,600 in the near term as companies revised lower earnings forecasts for 2023, he warned.
• Next year, the S&P 500 could see nearly flat returns, added Kostin, who estimated it could end 2023 at 3,750 to 4,000.

David Kostin, chief equity strategist at Goldman Sachs, said the S&P 500 may bottom earlier this year and returns will be near flat in 2023, even if the US avoids a recession.

In an interview with CNBC on Tuesday, Kostin warned investors that the S&P 500 could fall to 3,600 in the near term as corporate earnings estimates for 2023 have already been revised downward “quite significantly” in recent months. That would be a new test of a low from earlier this year in June, when inflation clocked in at a 41-year high of 9.1%.

Next year, the S&P 500 could see nearly flat returns even if the U.S. sidesteps a recession, added Kostin, who estimated the benchmark stock index could end at 3,750 to 4,000 in 2023. On Tuesday, the S&P 500 hovered around 3,930.

“Therefore, if valuations are around this level, I think that’s an optimistic scenario and there’s not much earnings growth, you basically have a flat market,” Kostin warned. “On the other hand, if you have a recession, it’s not the base case if your earnings are down 11% next year, that would suggest that the market basically ends at 3,750 a year from now. So I think 4,000 to 3,750 is a kind of range you’re likely to see. In the short term, downside risk around 3,600.”

If earnings suffer from lackluster growth, stock prices will be largely driven by valuations and interest rates, he said. And while the S&P 500 is down 17% from its January level, the index’s price-to-earnings ratio is currently hovering around a multiple of 18. Historically, that’s around the 80th percentile, meaning headwinds are likely next year. to be.

Meanwhile, other Wall Street bankers have warned of an even sharper 20% drop in the market as stocks battle rising interest rates, high inflation and other corporate earnings headwinds.

Morgan Stanley’s chief equity strategist, Mike Wilson, warned that earnings forecasts for 2023 were about 20% too high, meaning an earnings recession and ensuing market bottom could be as early as the first half of next year.

More bullish market commentators disagreed, with former PIMCO chief economist Paul McCulley stating that stocks were now fairly valued after speculative parts of the market burst this year, such as in technology and growth stocks.

Fundstrat’s Tom Lee, who has predicted a blistering stock rally in the final five weeks of the year, noted that the S&P 500 is down 30% this year in real terms, a sign that financial conditions have already tightened and that a great revival lies ahead.