It’s a new year for the stock market. And fortunately for investors, 2023 should bring much greater profits than 2022.
Of course, that’s not a tough hurdle to clear. Last year was particularly difficult for stocks. Both the S&P 500 and Nasdaq experienced their worst annual performances in over a decade. In fact, their respective 20% and 30% declines made for one of the worst annual index performances in the past 100 years! It’s worth noting, however, that double-digit drops are not uncommon throughout stock market history. They can be overcome.
The good news is that an underperformance of this magnitude won’t be hard to outperform in 2023…
Actually, stocks will do more than just beat their 2022 showing. They’re going to absolutely soar in 2023.
Ultimately, 2023 could go down as one of the best years ever for the stock market.
That’s a bold statement to make in any environment. And in this environment, with stocks seemingly falling further each day, it is an especially bold statement to make.
In fact, it’s the kind you don’t voice unless you have the receipts to back it up… So, if I may, I’d like to offer five key pieces of evidence as support…
Within the next few minutes, I’m confident I’ll convince you that a big stock market boom is on the way.
I’m staking my own credibility in order to make some investors filthy rich.
So, let’s get to it: Here are five big reasons why the stock market will boom in 2023.
Reasons Why Stocks Will Boom #1: Awful Years Don’t Repeat
Let’s kickstart this list with perhaps the most obvious reason. The stock market had an awful year in 2022, and it pretty much never has two awful years in a row.
In fact, excluding the Great Depression, awful years for the stock market have always been followed by great ones.
The S&P 500 dropped 20% last year. The last time it dropped 20%-plus in a single year? 2008. The next year, stocks soared 24%.
Before that, the last time was 2002. In 2003, stocks soared 26%.
And before that, it happened in 1974. And in 1975, stocks soared 32%.
The list goes on and on, all the way back to the 1930s. Over the past 90 years, every single time the market fell by 20%-plus in a single year, stocks soared the following year. And oftentimes, they rallied more than 25%.
2023 will not be the first time in 90 years that the stock market follows up an awful year with a bad one. Just like in 1938, 1942, 1975, 2003, and 2009, it will be a year of record returns.
Reasons Why Stocks Will Boom #2: Falling Inflation = Rising Stock Prices
Continuing on the thread of ostensibly obvious reasons why stocks will soar this year, let’s talk about inflation.
Inflation is not good for the U.S. economy, and consequently, it’s not good for U.S. stocks. When inflation rises, stocks tend to struggle. When inflation falls, stocks tend to soar.
In 2022, inflation rose very quickly. Stocks got sucker-punched. But in 2023, though, inflation is expected to fall very quickly. It reasons that stocks should rocket higher.
History says this is exactly what should happen.
Over the past 75 years, peak inflation has consistently been a very bullish signal for stocks. In that time, we’ve seen seven different bouts of red-hot inflation. In five of those seven episodes, stocks soared in the 12 months after inflation peaked, with an average return of 12%.
The only exceptions? 1947/48, when stocks were basically flat, and 2008/09, in the midst of the Great Financial Crisis.
In other words, when looking at the stock market through the lens of inflation, either stocks will soar next year as inflation comes down, or another Great Financial Crisis is brewing.
News flash: Another financial crisis is not brewing. Therefore, it seems exceedingly likely that falling inflation will spark huge stock market gains in 2023.
Reasons Why Stocks Will Boom #3: Fed Pauses = Stock Market Booms
The third big reason why the stock market will boom in 2023 is because the Fed will inevitably end its rate-hike cycle within the next few months. As inflation falls and the economy slows, it will stop hiking interest rates.
This so-called “Fed pause” is very bullish for stocks. In fact, Fed pauses systematically spark stock market booms.
That is, every single time the Fed has paused a rate-hike cycle over the past 50 years, it caused a big stock market melt-up.
Most recently, the Fed paused a rate-hike cycle in early 2019. Stocks soared 30% in 2019 and into early 2020.
Before that, the Fed paused a rate-hike cycle in mid-2006. Stocks soared 25% over the next year.
Fed pauses also happened in early 1997, early ‘95, early ‘89, and mid-1984. Those pauses all started stock market rallies of at least 15%, with an average return of nearly 30%!
The Fed will pause its rate-hike cycle in 2023. I think that pause will happen in February. The market thinks it will happen in May. Either way, a pause is coming.
Will this be the first Fed pause in history that doesn’t spark a big stock market rally? Or will this Fed pause, like every one before it, push stocks higher?
I like the odds of the second possibility considerably more than the first.
Reasons Why Stocks Will Boom #4: Valuations Are Discounted
Another major reason stocks will soar in 2023 has to do with valuations.
That is, going into 2022, stocks were incredibly expensive. That’s partly why they fell so far last year. But stocks have since fallen far enough that they are now pretty cheap – cheap enough that history says there’s a 90% chance they rally over the next 12 months.
Here’s the data…
The S&P 500 is trading at 18X trailing earnings. That’s a pretty “normal” valuation. But the 10-year Treasury yield is at 3.8%. That’s a pretty low yield. As you probably know, lower Treasury yields allow for higher P/E multiples.
Therefore, in the context of a sub-4% Treasury yield, the market’s 18X trailing P/E multiple is actually very cheap. This cheap valuation should theoretically provide a basis for stocks to power higher in 2023.
History backs up the theory here.
Since 1962, whenever the S&P 500 P/E multiple has been under 18 at the same time the 10-year was under 4%, stocks rallied over the next 12 months 90% of the time, with an average return of 14%!
In other words, the current valuation dynamics in the market imply that stocks have a 90% chance of rallying about 14% next year.
I don’t know about you, but I like those odds!
Reasons Why Stocks Will Boom #5: The Economy Will Avert a Deep Recession
Arguably the biggest reason why stocks will soar this year is that the U.S. economy will avert a deep recession.
That is, everyone is worried about a recession coming in 2023 – and reasonably so. Nearly every leading indicator of economic activity is pointing downward. The U.S. economy is slowing quite dramatically right now. If this slowdown persists, the economy will find itself in a recession very soon.
That seems almost unavoidable at this point. The U.S. economy will very likely experience a recession in 2023.
But the magnitude of that recession will be very small – and that’s what matters.
Let’s recall what is causing this recession: The Fed. The central bank has hiked interest rates aggressively, and that has slowed economic activity. Remove the Fed, and you remove the slowdown.
The Fed will be removed from the equation in 2023. Inflation is crashing, and the economy is slowing. That’s a recipe for the Fed to pause on rate hikes. And when it does pause, the U.S. economy will restabilize.
Importantly, this re-stabilization will happen when levels are still pretty healthy, meaning the economy should avoid a deep recession (and may even avoid a recession altogether).
The most composite gauge of U.S. economic activity – the Conference Board’s Composite Leading Indicators Index – is currently flashing a reading of 98.4. That’s not great. But it’s not awful, either. Typically, shallow recessions feature readings between 96 and 98. Deep recessions tend to have readings of less than 96.
In other words, if the Fed pauses within the next few months, U.S. economic activity should stabilize at levels far above what is typically associated with a deep recession, and even above levels that are typically associated with mild recessions.
In short, the U.S. economy should avoid a deep recession in 2023. And it will likely even avoid any sort of recession.
That, of course, should help stocks power higher in 2023.
The Final Word
Are you ready for the next stock market boom?
Most investors aren’t. But if you position yourself correctly, you could make a fortune.
In the past, the stock market has staged massive comebacks in years like 2020, 2009, and 2003, with more than 10 stocks soaring over 1,000% in each instance. If history is any indication, a stock market boom in 2023 should produce another 10-plus stocks that could soar 1,000% or more…
While 10 stocks may seem like a tiny moving target to hit, it’s actually quite large and stagnant. My team and I are constantly researching megatrends and analyzing the stocks within them. That allows us to root out the bad companies and to invest in the great ones.
Interestingly, investors have sold off these great companies in droves, despite their revenues rising higher and higher. It may seem counterintuitive, but the reason for this can be summed up in two words: “the Fed.”
The central bank’s inflation-fighting rate hikes have hurt the companies with the largest chance of rising 10X – small- to mid-cap growth stocks. But this “divergence” in stock price and sales always leads to a snap-back rally.
That’s why we’ve collected these stocks in our model portfolio. I won’t play coy. Investing in divergence stocks is your best chance at holding one (or more) of the 10-plus stocks that could score you life-changing gains.
Learn how you can be prepared for the next stock market comeback.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.