This year may turn out to be absolutely outstanding. To shed a light on a gloomy future of markets in 2023, we asked analysts to share their predictions. Today, we publish predictions of Santa Zvaigzne-Sproge, CFA, Head of Investment Advice Department at Conotoxia Ltd., related to S&P 500, Nasdaq, certain sectors and industries.
At the moment, we see numerous factors that have a negative impact on S&P 500 and Nasdaq Composite – lowering money supply in the US and increasing interest rate environment to name a few. As the Fed has indicated that possibly there will not be interest rate reductions in 2023, it may suggest that the stock market in general and the two indices could continue losing value also in 2023 despite what seems to be a very optimistic beginning of the year. For S&P 500 major support levels may be 3500, 3375, 3200, and even 3000 before starting to recover.
As Nasdaq Composite if compared to S&P 500 overweighs two sectors – technologies and consumer discretionary – that perform poorly during turbulent market conditions (as they have already in 2022), it may suggest that Nasdaq Composite may perform worse than the S&P 500 as long as the economic conditions don’t improve.
Surely, investors’ eyes are closely monitoring each move by the Fed looking for a sign of a potential policy pivot. In case the Fed officials decide to abandon their hawkish stance sooner than expected, S&P500 and the overall stock market may experience a recovery accordingly.
Generally, the best-performing companies during turbulent market conditions are those with a healthy balance sheet (leverage ratios in particular) and stable income. These features are more common among large companies. Meanwhile, the small, more risky companies are generally the first ones to indicate the turnaround in the economic sentiment. As in 2022, the growth stocks were hit the hardest, they may have approached (or are close to) their normal valuation levels. And as stock prices look forward, growth stocks could be the winners as soon as the earnings prospects start to improve in the following year. Although, it would be too risky to assume that the turning point has already come.
As long as investors keep looking for safer investments, commodities and companies whose earnings are highly dependent on commodity prices may provide such a safety net. Industrial metals may benefit from the reopening of the Chinese economy, defense industry and its materials may continue benefiting from the aggravation of geopolitical conflicts around the world. Lithium and other raw materials such as graphite used for batteries in electric vehicles and other products may continue benefiting from heightened current and expected demand combined with insufficient supply.
Although energy stocks have already earned impressive returns in 2022, the Western price cap and EU ban on seaborne imports of Russia’s crude oil may pose further profit opportunities to Western oil companies as long as the conflict situation is not resolved. It may be beneficial to wait for a drop in prices for these companies to add them to the portfolio at discounted prices. Furthermore, energy companies are known to pay strong dividends – a stream of income that may partially offset deteriorating portfolio value during a market downturn.
