World Bank Predictions for 2023: Is Crisis arriving in Stock Markets?

What to watch out for this year according to JP Morgan?

The largest US bank JP Morgan expects a very volatile year. With stock markets to reach their bottom as soon as during the first half of the year. JP Morgan sees the main reason for this in the Fed’s tightening monetary policy. According to the bank, it will raise interest rates above 5% because of weak fundamentals. The bank then expects a retest of the annual low, which is around 3500 points on the S&P 500 index. This year will also be accompanied by falling inflation in the US, rising unemployment, and falling corporate profits. According to JP Morgan, these factors should convince the US central bank to turn around and start cutting interest rates again. This turnaround should result in a rise in US share prices.
 

Which moment will be the key one for investors?

It is therefore crucial for investors to watch for the first signs of interest rate cuts when the Fed Governor speaks. It is this moment that could be the catalyst for longer-term growth. Bank of America shares the same view but is more cautious about the S&P 500 moving back higher - as evidenced by its target price of 4,000 points. The risk, however, is a too-early cut in interest rates, which could return inflation to the markets. And no one among US central bankers wants that.

The market is now considerably more optimistic in this regard - it expects terminal interest rates to be in the 4.75% to 5.00% range and then one or two rate cuts before the end of the year. However, this does not correspond with the speeches of Fed officials who do not intend to cut interest rates this year. The market's excessive optimism may thus be the next catalyst for a sell-off, possibly at the next meeting in early February. The next one may be disappointing economic results.  
 

_{Probability of the level of US interest rates at the end of the year from CME Group. The market is currently pricing in one to two rate hikes, but this is not consistent with Fed speeches.}

Earnings per share for the S&P 500 in 2023 according to Morgan Stanley

Economic results were one of the triggers for the big stock rally last year. This year, however, it may be the other way around - rising interest rates may reduce consumption, and inflation in turn raises the cost of labor and materials. This is what Morgan Stanley cites as one of the biggest risks. For the entire S&P 500 index, it expects earnings per share of $195, which would correspond to a 15% to 20% decline from current levels. However, in the second half of the year, it expects to return higher again and finish 100 points below current levels. Citigroup also expects a fall in profits, but it does not share the same skeptical view - profits will fall, but not by as much as the market expects.
 

However, even among banks, there are optimists

A fresh gust of air in terms of positivity in their expectations was brought by investment bank Jeffries. While it forecast a 6% year-over-year decline in EPS for the S&P 500, it also highlighted several positives. One is the weakening US dollar, which is boosting earnings at export-oriented companies. The Fed then says the bank will succeed in taming inflation, which peaked last June. The risk, however, is still a very tight labor market, with unemployment in the US even falling to 3.5%. However, the first sign of easing is lower wage growth for December. The opening up of China is also a positive - this is where the bank sees great potential for growth. However, it also expects the US S&P index to end the year 5% above its current level of 4200 points.

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