Wall Street analysts were fairly accurate in their predictions of S&P 500 companies’ 2022 corporate earnings but missed this year’s bear market completely, contends an article in The Wall Street Journal. Strategists for Goldman Sachs, JPMorgan Chase, and Citigroup forecast earnings within $1, the narrowest estimate since 1995, according to data from Refinitiv IBES cited in the article. But all that attention paid to earnings pulled focus away from bond yields, which should have been the focal point this year. As the Fed raised rates to combat record-high inflation, the price side of the price/earnings ratio plummeted—something that strategists overlooked with their forecast last December of interest rates at 0.5%. The current interest rate is a range of 4.25% to 4.5%.
Most strategists also got the stock direction wrong as well; JPMorgan, Goldman Sachs, and Citigroup all had bullish forecasts, predicting heights of 5100, 5050, and 4900 for the S&P 500, respectively. And while Bank of America had a bearish outlook, they predicted a slim 3% drop—not anywhere near the 19% the index has fallen this year. The underlying belief running through all these predictions was that inflation would be brief and temporary, that supply-chain issues would clear up, and the Fed wouldn’t be so aggressive with their rate hikes. That belief turned out to be woefully mistaken, and inflation was exacerbated by the war in Ukraine, the article maintains. Furthermore, the market has been highly sensitive to the Fed’s actions this year.
Predictions for 2023 lean heavily toward stocks going back up, though not by a lot, and earnings will be weak. Bank of America, Citigroup, and Goldman Sachs are all forecasting a 4000 ending for the S&P 500 next year, with Citigroup firmly expecting a recession while Goldman believes a recession will be avoided. Meanwhile, JPMorgan predicts the S&P 500 to get up to 4200, but that the market will be so volatile the Fed will be forced into easing their policies. Most analysts are predicting at least a mild recession that will weaken growth and negatively impact earnings by the end of 2023. That could result in two “pain trades” that no one is prepared for: a deeper and longer recession than anyone expects, or a booming economy brought on by more transitory inflation, which would take investors by surprise. And while those predictions may turn out to be accurate for earnings, they could be completely off-base for stocks and bonds as they were this year, the article concludes.