CAC40, NASDAQ... What are the risks of the stock market in 2023?

CAC40, NASDAQ… What are the risks of the stock market in 2023?

CAC 40, Nasdaq, S&P 500, Euro Stoxx 50… The stock market got off to a very good start in 2023, after a difficult year in 2022 marked by a “roller coaster” after the invasion of Ukraine by Russia and while the central banks tightened their monetary policies significantly In the face of soaring inflation. Renewed optimism in the stock market which is explained by hopes for inflation (low energy prices, slowing wages in the US, etc.) and growth (the scenario of a very deep recession, particularly in Europe, is considered much less likely).

Earnings estimates of listed companies are still high. Corporate results “are expected to rise by 3% over the next twelve months, estimates that are nevertheless very optimistic in light of the expected deterioration of the global economy,” however, judges the private bank Neuflize OBC (ABN Amro Group), which remains somewhat cautious What about equities (especially in Europe), as the impact of the recession still seems not to be sufficiently incorporated into stock market prices. The profits of listed companies may decline by 10 to 15% in 12 months, in an unfavorable context for the economy in the first quarters of 2023, according to it.

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Expectations of attractive gains in the stock market for the next few years?

But for the stock investor, there is reason for hope. First, Neuflize OBC notes that “the symbolic bubbles of the Covid-19 crisis”, in particular the Spac bubbles (Special Purpose Acquisition Companyor a career-defined acquisitions firm, with no operating activity) and those of high-growth (but not very profitable) stocks, have already imploded.

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Moreover, on Wall Street, the S&P 500 (the barometer of US stocks and the most followed stock index on the planet) has already fallen by 25% (to its lowest level in October, in 9 months). These numbers compare to those of the nine bear markets charted since World War II (the S&P 500 averaged 38% below a major peak, over an average of 18 months), suggesting that the bear market may still have a way to go. Long to go, but also that the bulk of the price decline will already be behind us.

Moreover, since 1945, after a 25% decline, the S&P 500 has recorded an average 1-year performance of 7.3% and a 3-year performance of 29%. Best, from 5 years, “performance is always positive,” with an average gain of 54% over 5 years and 142% over 10 years, says Neuflize OBC. Encouraging statistics, for the long-term investor, who will nonetheless be able to watch for a certain number of risks and issues this year 2023, after a worrying 2022.

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It can resist inflation, and stay structurally higher

In the short term, inflation refers to the time, between a slowdown in demand (pressure on the economy and household consumption), a decrease in supply tensions (the collapse of the cost of sea freight from China) and a drop in energy prices. However, we do not yet know if inflation will be able to return to its low pre-crisis levels or if we can expect a permanently higher inflation regime, due to the slowdown in globalization (China in world exports has been in the doldrums for several years, after (which has seen a rise until 2015-2016), the cost of the environmental transition (the price of a ton of carbon dioxide remains high despite the economic slowdown) and the ever-rising energy price.

Will central banks end up succumbing to the threat of recession?

The path of the main rates of the Federal Reserve and the European Central Bank is another big risk. The Federal Reserve in particular could raise its key interest rate to at least 5%, while the European Central Bank could still raise interest rates significantly, in the face of inflation, as equity investors expect. However, in the face of a recession that should develop in the major Western powers, Neuflize OBC is betting that the Fed and the European Central Bank can cut their key rates significantly in the second half.

The energy price shock could continue

Moreover, along with the marked decline in recent months in energy prices (oil, gas, etc.), Neuflize OBC fears that the energy shock will remain “significant for the coming quarters”. On the supply side, the banknotes are “multiple restrictions” (excluding Russia from Western markets, OPEC + quota on oil supplies, restrictions on French nuclear energy). On the demand side, “the slowdown in Western countries, energy savings in Europe (facilitated by mild temperatures) and the recovery of the Chinese economy are in opposition.”

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Expect a recession in the first half of the year

On the economic growth front, neofeliz is currently counting on a recession on both sides of the Atlantic (mild in the US and more pronounced in Europe), even if the second half of the year is more favorable, with an expected resumption of activity. The first quarters could be tough, as households’ purchasing power is strained by inflation, while high interest rates make it difficult for households to access US real estate.

So far, the US economy has been quite resilient, but the excess savings ($2 trillion accumulated during the Covid-19 crisis) should dissipate by the end of the first half of the year. Banks are tightening their credit conditions. Finally, the job market could deteriorate. In the United States, already, “the first signs of recession are emerging,” notes Neuflize OBC, which points to a decline in the confidence of real estate builders and new orders placed for companies. Fortunately, corporate debt and household debt do not show massive imbalances, which is instead driving a mild recession.

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In Europe, where inflation has reached double digits recently, consumer confidence has fallen to historic lows. Europe is heading towards recession in the first half. The interest rate shock should have its full effect this year, while the old continent should suffer from the future deterioration of the US economy.

As for China, which paid a heavy price for Beijing’s strategy to eradicate the Corona virus, household consumption and investment in it are on the wrong track, but “excess savings and economic policy support should allow the economy to rebound in the spring,” OBC Novellis judges, who notes The growth of new loans tends to accelerate. However, the bank expects a moderate recovery of the Chinese economy. Indeed, corporate debt (almost 220% of GDP) is very high, which will structurally affect growth.

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Geopolitical and financial risks

The development of the war in Ukraine will be something to watch. Potential de-escalation could allow for a reduction in the risk premium on European equities (and thus positively impact stock market prices). Conversely, renewed tensions could lead to unrest.

Moreover, while a key Fed rate hike in 2022 has historically been surprising, it is clear that financial risks are on the table. An analysis of the past 50 years shows that when the Fed is severely tightening monetary policy, shocks often occur in the financial sphere. In recent quarters, interest rate hikes by the Federal Reserve have fueled, among other things, tensions over UK debt and bursting bubbles in technology stocks and cryptocurrencies.

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