Investor Essentials Daily

Gearing up for a sideways market in 2023

January 8, 2023

Stock market performance follows earnings growth. In other words, if you don’t have earnings growth, it’s tough for the market to expand.

2022 was a brutal year for earnings, hence the market’s bad performance. Right now, the data suggests 2023 could be slightly better… albeit not by much.

Today, we’ll look at how earnings might play out in 2023, and what that means for the market.

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The experts are expecting the economy to slow down…

Unless you’ve been living in a cave, this probably isn’t news. For months, the mainstream media has been expressing concerns about a potential recession.

We’ve enjoyed a decade of strong growth. Now, things have changed. The largest economies around the world have been facing rising inflation. Pandemic-related supply-chain delays are still hurting businesses.

And the Russian invasion of Ukraine has disrupted trade… and caused an energy crisis in parts of Europe.

Even some of the biggest international agencies are getting on board.

The International Monetary Fund (“IMF”) and World Bank have both warned about a worsening global outlook.

They believe we’ll see slowing economic growth in 2023 as the risk of a recession grows.

Regular readers know we also believe we’re on course for a recession. However, that doesn’t mean the economy is headed for catastrophe.

As I’ll explain today, the numbers tell us to expect a sideways market for the foreseeable future.

Every month, our team updates what we call our U.S. aggregate return on assets (“ROA”) model. It averages the Uniform ROA of all public U.S. corporations.

Uniform ROA was forecast to drop 100 basis points (“bps”) – or 1% – in 2022. Take a look…

Now, there are a few important points to keep in mind here. A 1% drop might not seem like a lot. However, when you look at it in terms of the whole U.S. economy, it’s pretty significant. It corresponds to about a $100 billion drop in profits for 2022.

Earnings growth is what drives the stock market higher… so that’s why last year, the S&P 500 slid 25%.

Plus, Uniform ROA was forecast to be flat (if not slightly up) for the year as recently as August. The picture has gotten worse since then.

Uniform ROA expectations for 2023 have also come down. Previously, Uniform ROA was expected to approach 24%… now it’s looking to be closer to 13%.

And on top of that, earnings may also fall. Uniform earnings for 2022 were previously projected to rise 5%. Now, they’re forecast to shrink by 3%.

Inflation has seen costs rise to historic levels. Both companies and consumers are having trouble keeping up.

In an effort to battle inflation, the Fed has aggressively raised interest rates hoping to slow down the economy.

This has resulted in the decline of economic growth that we’re seeing today and expecting to see for the rest of 2023.

So right now, we’re getting mixed messages between ROA and earnings expectations. Between that, and the fact that expectations are still falling, the hope that folks had for 2023 are starting to fade.

Now, we’re seeing the results of that pressure in the data.

We’ve been calling for a deceleration of the economy and a recession on the horizon for months now.

Now the data is confirming our claims. This is another reason why we believe we’re likely to see a continued sideways market in 2023.

That means, as an investor, you need to be tactical this year. In a sideways market, some industries will perform better than others.

And opportunities may pop up from time to time, although this isn’t the type of market you can buy and hold and expect good returns, like we could for most of the 15-year bull market following the Great Recession.

Best regards,

Joel Litman & Rob Spivey

Chief Investment Strategist &
Director of Research
at Valens Research

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