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2023_SP_500_Wall_Street_Forecasts


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00:00:00.000 | Hello, everybody. It's Sam from Financial Samurai. And in this episode, I want to talk
00:00:04.380 | about the 2023 Wall Street S&P 500 forecast, because I just got a look at 16 forecasts
00:00:13.720 | and the dispersion is huge. It doesn't look like anybody knows what's going to happen.
00:00:19.460 | So the S&P 500 price target ranges between $3,675 to $4,500. This implies returns of
00:00:29.400 | between negative 9% to positive 12% based off the S&P 500 today at around $4,000. According
00:00:38.560 | to a Bloomberg survey, the average 2023 S&P 500 forecast is $4,900. So that's basically
00:00:47.020 | saying we're not going to go anywhere for 2023. And a recent Reuters poll of 41 Wall
00:00:53.080 | Street strategists shows a median S&P 500 price target of $4,200. So not bad, but that's
00:01:00.040 | 5%, 5% increase for the year. Hey, we'll take it after a terrible 2022. But up 5% is not
00:01:07.880 | that inspiring. Knowing this range of S&P 500 price targets for 2023 is important because
00:01:15.520 | all investments, all risk asset classes are based off the risk free rate of return. So
00:01:21.120 | the risk free rate of return is the 10 year bond yield and the 10 year bond yield is about
00:01:25.440 | 3.6%. So if you don't believe the S&P 500 is going to be greater than 3.6%, then you
00:01:31.440 | shouldn't be investing in the S&P 500. And you should be investing in 10 year Treasury
00:01:35.920 | bonds. But what's interesting right now is that there's a huge yield curve inversion.
00:01:42.880 | So again, the 10 year bond yield is at 3.6%. But the one year Treasury bond yield is at
00:01:48.760 | about 4.7%. So that's a 1.2% inversion, which is the highest since 1981. And what's also
00:01:59.080 | interesting to note is that after every single yield curve inversion, especially a really
00:02:04.720 | deep inversion, a recession follows within the next 12 to 16 months. So I absolutely
00:02:10.680 | believe in 2023, we're going to see a recession, another recession, because we saw one technically
00:02:16.200 | in the first quarter and second quarter of 2022. And we're gonna see another one in 2023.
00:02:21.560 | Maybe it's in the third and fourth quarter, because excess savings is getting spent down
00:02:26.720 | the Fed if the Fed hikes to 5% on the Fed funds rate and keeps it there for, let's say
00:02:31.360 | six months to eight months, we're going to see millions of job losses, millions of job
00:02:36.920 | losses. And that's what the federal wants to reign in inflation, which is already coming
00:02:41.720 | down. You've seen the PC numbers come down. We saw the October CPI numbers come down,
00:02:47.080 | we're probably gonna see the November numbers come down. So the trend is down and inflation,
00:02:53.560 | just as it rose really quickly, can fall really quickly because the cure for inflation is
00:02:59.400 | higher prices. And that's what we saw. And then we've seen demand destruction. So the
00:03:03.480 | Fed continues to be aggressive as inflation rates are falling. We're probably going to
00:03:08.840 | be in a world of hurt. So hang on to your jobs, focus on being a good employee. Don't
00:03:15.720 | piss anybody off, keep your head down, come into the office earlier, leave later, this
00:03:20.320 | whole quiet quitting thing. It was interesting. It was it was good for like, I don't know,
00:03:24.760 | six months of quiet quitting, just do the minimum to not get fired. But now if you do
00:03:29.040 | the minimum, you're probably going to get let go, you're probably gonna get let go of
00:03:32.840 | the bottom 10%, 15% in a recession, generally always gets let go. Why wouldn't they get
00:03:39.200 | let go? If you were the boss, and you needed to cut costs, you're gonna let your bottom
00:03:43.720 | 10 to 20% of performers go. Just look at Twitter. It's interesting because Elon has let go of
00:03:51.640 | 75% of the staff, so thousands of people, yet Twitter is still running. Now some will
00:03:56.640 | argue, well, there's a freeze in, you know, the programming and the coding of Twitter.
00:04:02.200 | So that's why things don't break. That's what big tech companies do. They freeze the code
00:04:07.200 | during you know, big holidays and so forth. So things don't break. And as soon as they
00:04:10.920 | start adding new features and updating things, Twitter is going to start breaking and getting
00:04:15.840 | glitchy. But still, if you cut 75% of the workforce, and it's still working fine, and
00:04:20.520 | actually, the user base is growing, and the activity is growing. You should be worried,
00:04:27.240 | at least if you're in big tech, that there's a lot of fat to cut. There's always a lot
00:04:31.180 | of fat to cut. And there's more fat to cut. It's more apparent during a recession in a
00:04:36.080 | bear market. For 2023, the key risks to the S&P 500 performance now include earnings cuts
00:04:43.320 | and valuation multiple compression. So these two things were to happen, the S&P 500 could
00:04:48.280 | easily decline by 15%, 10-15% from current levels. Now, conversely, there could be greater
00:04:55.880 | than expected earnings cuts, everything is relative. But there could be a valuation increase
00:05:01.160 | right. So as earnings are get get cut, you know, the market doesn't go down as much,
00:05:06.880 | and therefore valuations increase. And this would occur if the market looks beyond the
00:05:11.400 | earnings cuts, because we just expect them to be cut. And then the market expects better
00:05:17.480 | times ahead. And the better times ahead could be as a result of the Fed pivoting sooner
00:05:23.240 | than expected sooner than let's say, March 2023. And they start saying, Hey, look, we
00:05:28.980 | see recognize inflation is coming down, we're not going to raise anymore. And we're actually
00:05:32.520 | going to start cutting sooner than expected. That could easily reignite the bull market
00:05:37.160 | and get the S&P 500 back to let's say, 4500. And I do personally believe the worst of the
00:05:43.320 | bear market is over when the S&P 500 hit 3577 in mid October 2022. What matters most is
00:05:52.680 | what the Fed plans to do over the next 12 months. I've written in my previous posts
00:05:58.560 | and newsletters how maddening it is to be a public company CEO, because you can improve
00:06:05.120 | operational efficiency, expand margins, grow revenue and grow profits. And you could still
00:06:11.200 | see your stock price go down because the stock market is basically, I would say 80 plus percent
00:06:17.520 | controlled by what the Fed is doing. Don't fight the Fed on the way up or down. As Asana
00:06:24.400 | billionaire CEO Dustin Moskowitz wisely quipped, I'm CEO of the Asana company, but lately,
00:06:31.960 | Jay Powell has been CEO of the stock price. And sadly, this scenario will likely continue
00:06:37.080 | to be true for the next 12 months. So the positive about this, so the positive is that,
00:06:43.560 | hey, you could be really sucking wind into your company. But if the Fed pivots and starts
00:06:48.680 | injecting liquidity back into the system and starts lowering interest rates again, your
00:06:53.520 | stock price could do well. It might not outperform the broader markets, but it could actually
00:06:57.960 | start going up again. So let me share some of the prognostications of the various Wall
00:07:03.720 | Street analysts from bearish to neutral to bullish. So let's see, SG has a 3800 target
00:07:09.520 | price and it says our quote hard soft landing scenario sees EPS growth rebounding to 0%
00:07:17.520 | in 2023. Rebounding to 0%. We expect the index to trade in a wide range as we see negative
00:07:24.200 | profit growth in the first half of 2023. A Fed pivot in June 2023. China reopening by
00:07:31.200 | a third quarter 2023 and a recession in the US in the first quarter of 2024. That's interesting
00:07:37.360 | that they say in the first quarter 2024, I would think it'd be a little bit sooner. And
00:07:41.960 | China is actually reopening now because there have been so many protests and you're seeing
00:07:46.880 | the COVID zero policy get a little bit softer now. Just check out the news. They're getting
00:07:52.920 | a little bit more lenient about allowing people to have more freedom. All right, Mike Wilson
00:07:58.520 | from Morgan Stanley, he is supposedly the number one rated institutional investor strategist.
00:08:03.800 | He has a target of 3900. So what is that? Two and a half, 3% below current levels. He
00:08:10.200 | has an EPS of $195 per share for the S&P 500. And he says this leaves us 16% below consensus
00:08:17.720 | for 2023 in our base case and down 11% from a year over year growth standpoint. So that's
00:08:24.320 | below consensus. He believes consensus will come down. So he believes consensus will come
00:08:29.360 | down and he sees a price trough of between 3000 to 3300. Now that if that happens is
00:08:37.120 | going to be very, very painful because that's another what 20% downside from here. And if
00:08:43.600 | that happens, there's going to be blood on the streets and that might force the Fed to
00:08:48.560 | pivot finally. All right, now let's look at a couple of the neutral houses, my old stomping
00:08:54.520 | grounds Goldman Sachs has a 4000 target, so no growth, 224 EPS. The performance of US
00:09:01.680 | stocks in 2022 was all about a painful valuation derating. But the equity story for 2023 will
00:09:09.240 | be about the lack of EPS growth. Okay, therefore zero earnings growth will match zero appreciation
00:09:15.560 | in the S&P 500. That sounds like it makes sense, but that's probably not what's going
00:09:20.920 | to happen. The market always discounts something. They're not going to simply say no earnings
00:09:24.640 | growth, no S&P 500 growth, there's always some kind of change. Credit Suisse, they have
00:09:29.240 | a target of 4050. So two and a half percent upside, they have an EPS estimate of 230.
00:09:37.400 | And they say 2023 is a year of weak, non recessionary growth and falling inflation. All right, finally,
00:09:43.660 | the most bullish Wall Street house is Deutsche Bank with a 4500 target price. So a 12 and
00:09:50.120 | a half percent upside from the recording of this podcast $195 EPS per share. So that's
00:09:57.160 | interesting. They've got the highest target price, yet they have one of the lowest EPS
00:10:02.000 | per shares. As you recall, Credit Suisse and Goldman Sachs had like a $230 EPS per share.
00:10:07.680 | So this is the case where they think there's going to be a valuation re rating, I guess
00:10:13.240 | valuations go up, and the stock market goes up because investors will be discounting the
00:10:19.160 | current unpleasant times and better times in the future. So Deutsche Bank writes, equity
00:10:24.120 | markets are projected to move higher in the near term, plunge as the US recession hits,
00:10:30.040 | and then recovers fairly quickly. We see the S&P 500 at 4500 in the first half, down more
00:10:36.400 | than 25% in Q3, and back to 4500 by year end 2023. So wow, now that is a roller coaster.
00:10:44.680 | Are you kidding me? So up 12 and a half percent by you know, Q2, I guess, and then down 25%
00:10:51.960 | in Q3, and then back right up. Come on now, that's, it seems totally ridiculous. But the
00:10:58.720 | truth is, nobody knows the future. And that's what they're predicting. And everybody has
00:11:03.280 | the right to predict where they see the stock market to be and then invest accordingly.
00:11:08.840 | So some of you have asked, what am I doing with my money? Well, in 2022, I thought, okay,
00:11:15.360 | maybe there might be 5%, 4 or 5% upside to the S&P 500 to 5000. But I also said that
00:11:23.040 | there would be greater than a 60% chance there would be a 10% drop in the S&P 500. So I didn't
00:11:29.920 | have strong, strong conviction to sell aggressively, but I was cautious. And I had about 30% of
00:11:36.200 | my net worth in public equities, which resulted quite now in about a 15 to 16% decline. Losing
00:11:43.160 | money stinks, but we've had a great 10 year run. But for 2023, it's really interesting
00:11:49.100 | because we now have one year treasury bonds yielding 4.7%. So if you take 4.7%, and times
00:11:56.680 | it by 4000 on the S&P 500 at this current moment, you get 4188. And if you look at the
00:12:04.720 | Wall Street strategist forecast, 4188 is in the top quintile, top quintile of forecast.
00:12:13.440 | So I think if, if we get there, I think most of us will be happy because we didn't lose
00:12:18.200 | money. And so if you can get a guaranteed 4.7%, right with no risk, and there's tax
00:12:26.240 | advantage of not having to pay state income capital gains tax on treasury bonds, that's
00:12:31.660 | really attractive for those in New York, Hawaii, California, and other high income tax states,
00:12:37.200 | then why not allocate the majority of your cash flow and savings to one year treasury
00:12:43.320 | bonds, it's the most relatively attractive treasury bond, again, because the 10 year
00:12:47.080 | bond yield is about 3.6%. For the remaining 30 to 40% of my cash flow, I'm going to be
00:12:55.000 | opportunistic and buy the S&P 500. If it's below 3800, if it gets below 3800, I'm buying
00:13:01.800 | more aggressively again. But right now just nibble here and there at 4000. It's just doesn't
00:13:06.720 | seem that attractive. In terms of real estate, I think real estate prices are going to fall
00:13:11.480 | like 10 to 15% by sometime in 2023. And then you're gonna have an opportunity to buy again,
00:13:18.560 | because the Fed is going to cut rates, and then demand will come back as mortgage rates
00:13:22.360 | decline, I totally see mortgage rates declining by two to 3%. So the average 30 year fixed
00:13:27.240 | mortgage rate could decline from a high of 7% down to four and a half to 5%. And when
00:13:32.680 | that happens, you better have some cash if you want to buy a new primary resident, or
00:13:37.720 | some rental properties, because I think the demand is going to whiplash back. So what
00:13:42.720 | else am I doing? Well, I'm definitely maxing out my tax advantage retirement accounts.
00:13:47.940 | So I just had the SEP IRA, because I have financial samurai as a small business. I do
00:13:53.840 | have a solo 401k, but I would have to do some freelance work to earn freelance income to
00:13:59.200 | contribute to that solo 401k. But if I do do any work, I'm going to be contributing
00:14:04.360 | the max that I can. For employees, you can contribute 22,500 pre tax to your 401ks in
00:14:11.920 | 2023. That's up from 20,500. So you best take advantage of that. Two, I'm going to contribute
00:14:17.740 | the gift tax limit maximum of 17,000 to each of my kids 529 plans. I super funded my son's
00:14:25.680 | 529 plan in 2017. So 2023, I can re-zoom contributing. And I think in retrospect, yeah, it was a
00:14:34.640 | good move, super funding, I just forgot about it. Let the market do what it would do. And
00:14:40.640 | here we are again. So I'm just going to contribute more to both son and daughters 529 plans.
00:14:45.720 | Three, I'm going to put the kids to work, see if they can earn at least $6,500 from
00:14:51.200 | our online business, and then invest that money in their respective Roth IRAs, right
00:14:57.000 | Roth IRA, you contribute after tax money. But if you earn below the standard deduction
00:15:02.640 | limit for 2023 of 13,850, you don't pay tax on that. And then the Roth IRA money compounds
00:15:10.560 | tax free and then you can withdraw it tax free. So it's like a triple win, no brainer.
00:15:15.160 | And the big no brainer for parents is to teach our children work ethic, the value of money
00:15:21.000 | and money management skills. And then finally, as long as I can get over a 4% risk free rate
00:15:26.640 | of return on treasuries, I'll be allocating 60 plus percent of my cash flow to buying
00:15:32.480 | treasury bonds. And then if the S&P 500 gets below 3,800 again, I hope it doesn't, but
00:15:38.400 | it clearly easily could. I'll start allocating 60 plus percent of my cash flow to buying
00:15:44.240 | the S&P 500 index regardless of where the one year treasury bond yield level is. I mean,
00:15:50.000 | obviously, if it's higher, I'm going to allocate that 40% to buying as much treasury
00:15:53.840 | bonds as possible. So you got to look at the levels, everything's relative, the risk free
00:15:58.840 | rate of return. And this is just for my stock and bond allocation capital, capital allocation,
00:16:05.600 | right? I've got private equity, you know, venture capital, venture debt, private real
00:16:10.640 | estate and physical real estate. But we can talk more about those other asset classes
00:16:16.240 | in another episode. So I'd love to hear what your forecasts are for the S&P 500 in 2023.
00:16:23.160 | Click over to the post and leave a comment. If you're looking to better manage your investments,
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00:17:29.920 | Alright everyone, I hope everyone has a wonderful rest of the year. I'm going to keep on cranking,
00:17:35.280 | keep on writing, keep on recording so long as my voice allows. And I'll see everyone
00:17:39.800 | around. Take care.