Goodbye (and good riddance), 2022! This past year has been an exceptionally tough one for the markets. In fact, it ranks among the worst in Wall Street’s history. And it’s easy to see why – decades-high inflation, a mega-hawkish Fed, soaring commodity prices, the Russia-Ukraine war, a strained global economy, and the threat of an incoming recession. Talk about harrowing.
But with 2022 in the rearview, we’re welcoming the new year with open arms – and renewed bullishness. In our first Hypergrowth Investing episode in 2023, we’re talking all about stock market predictions for the coming year. What will work in this new year, and what won’t?
Welcome to Hypergrowth Investing’s stock forecast for 2023. Let’s get into it.
10 Stock Market Predictions for 2023
Inflation will crash much faster than everyone thinks. The Federal Reserve’s aggressive rate hikes are working. Incoming economic data from various fronts all point to slowing inflation, most recently seen in manufacturing and commodities prices. Home prices will continue to moderate. Rents are plateauing and starting to recede in some cities. Indeed, disinflationary pressures are building across the board. That will continue rapidly throughout the year. And historically speaking, when inflation crashes, stocks rally.
The Fed will pause rate hikes much sooner than expected. Inflation is starting to crash. The economy is starting to slow, and soon, unemployment is going to rise. All that sets the stage for a pause in rate hikes in 2023. We anticipate the last rate hike in this cycle will happen in February – sooner than what the futures market is pricing in. And a pause is bullish for stocks. Our stock prediction? We think a Fed pause could kickstart a 12-month breakout on the order of 20%-plus.
The economy will avert a deep recession. For a majority of the past 15 years, folks saved at an above-average rate. And today, the consumer is still spending pretty robustly. This means that companies will continue to see earnings and will largely maintain their workforces, which should keep the labor market steady. So, barring some unforeseen Black Swan event, we should be able to avert a deep recession in 2023, especially if the Fed pauses in February. Could we see a shallow recession? Sure. But that’s pretty much already fully priced into stocks.
The start of the year could be choppy. Liquidity drives the markets. So, once the Fed pauses and stops its liquidity drain, stocks will soar. Until then, they will probably remain volatile. Considering a likely pause in February, we could see choppy trading into that month – before a face-melting rally into the end of the year.
The S&P 500 will soar at least 20%. Disinflation always causes price-to-earnings (P/E) multiples to expand. And based on the magnitude of disinflation we’re expecting in 2023, that is historically consistent with 25% to 30% P/E multiple expansion on the S&P 500. At the same time, earnings will likely be flat or, at worst, down 5%. If P/E multiples rise at least 25% and earnings come down at worst 5%, then the market should rally at least 20% in 2023.
The Nasdaq will soar at least 30%. High-beta tech stocks are especially inflation- and rate-sensitive. Therefore, if stocks do rally on the back of falling inflation and rates, tech stocks should outperform. Our historical analysis of how tech stocks behave after inflation peaks and the Fed pauses a rate-hiking campaign indicates that the Nasdaq should rally at least 30% this year.
Bitcoin (BTC-USD) will make a run for $100,000. Contrary to popular belief, we think better macros in 2023 – namely, a friendlier Fed, lower inflation, lower yields, and more money supply – will start a new boom cycle in cryptos. In that boom cycle, BTC could make a run for $100K.
Small caps will crush large caps. Going into 2023, large-cap stocks have traded around 17X forward earnings, while small-cap stocks have traded around 13X forward earnings. To put those numbers into perspective, large caps have reverted to “average” valuation levels, while small caps are trading near all-time-low valuations. That’s because investors have been playing defense against a potential recession by buying less-risky large caps. Once the tide turns in 2023, they’ll ditch the large caps and play offense with small caps. And that will cause small-cap stocks to win big.
The housing market will stage a big rebound. The housing market was absolutely crushed in 2022. But supply remains limited, and there’s a ton of dormant demand on the sidelines. Once mortgage rates move lower following a Fed pause, that demand will come flooding back into the market. We see the housing market making a big comeback next year, and with it, housing stocks should soar.
Certain high-growth tech stocks will rise 1,000%. There are a lot of parallels between the dot-com bubble of 2000-02 and the tech stock wipeout we just went through in 2021-22. And we think 2023 will look a lot like 2003: a massive rebound year for tech stocks wherein certain high-growth stocks soar more than 1,000%. Looking at the market today, there are certainly a handful of beaten-up, high-growth stocks that could soar 10X-plus in 2023 when the Fed pauses its rate-hike campaign.
That’s our stock market forecast for the next six months and onward. TLDR? We’re bullish; and you should be, too.
On the date of publication, Seth Kuczinski did not have (either directly or indirectly) any positions in the securities mentioned in this article.
