S&P 500 posts negative returns in 2022: Will New Year 2023 be different for US stocks?

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US Stocks 2023 outlook

The S&P 500, an index that is considered to be the best overall measure of the US stock market performance, has dropped about 20% of its value so far this year and is on track to record its worst calendar year performance since the global financial crisis that rattled stock markets back in 2008.

Let's look at the top trends that have driven US equity markets this year:

US Stocks 2022: Rising inflation pressure

Rising inflation has been the number one concern and reason for the US stock market to underperform this year. Soaring cost pressures pushed the US central bank to raise its interest rates on multiple occasions.

When interest rates rise, it makes the returns on stocks less attractive, pushing investors to move towards more safe investments like the US dollar and bond market instruments.

US Interest Rates: US central bank on rate hike path!

 The US central bank has continuously hiked its benchmark interest rates this year to tackle rising inflation.

For instance, the central bank maintains an inflation target of 2%. According to the latest data, the US economy had an inflation rate of 7.1% in November, much higher than the target.

When the US central bank hikes interest rates, it brings down the money supply in the economy because it makes taking loans much more expensive, leading to slower business growth.

Continuous rise in interest rates could lead to a recessionary situation. A recession is a temporary period of economic decline. Investors have been pulling out of riskier investments like stocks in anticipation of a recession due to the continuous rise of interest rates.

US Stocks 2022: Technology stocks suffer as interest rates jump

The Nasdaq index, which comprises of the top technology names in the US has suffered a 33% loss so far this year as an effect of rising interest rates. Generally, technology shares do not perform well in a high interest rate scenario.

 Technology shares are valued based on their capacity for future earnings since they are considered as growth companies and high interest rates tend to eat into those future earnings which pushed their stocks down when central banks raise rates.

Apple, Amazon, Alphabet (Google), Meta (Facebook), Intel have all lost between 25% to 50% of their values this year due to pressure from high interest rates.

US Economy: Aftereffects of the coronavirus pandemic

The coronavirus pandemic pushed consumers to spend less on account of lockdowns which raised the overall savings rate in the country.

When pandemic-related movement restrictions were put to an end at the beginning of 2022, there was a lot of pent-up demand among consumers and not enough supply to cater to such demand, pushing prices of goods and services higher.

US Economy: The Russia-Ukraine War push oil and gas prices

The ongoing conflict between Russia and Ukraine has been the sole reason to push global energy prices higher. Ever since Russia declared war on Ukraine, major Western superpowers heavily sanctioned Russian companies and exports.

Russia is one of the top exporters of oil and gas to the world and these sanctions pushed global oil prices, leading to high inflation.

US labor market and Interest Rates: Strong labor market equals more rate hikes

The job market in the US has continued to be resilient with fewer US citizens opting for unemployment benefits. This shows that there is ample spending power or demand within the US economy as against the supply of such products, which is keeping prices elevated.

US Stocks 2023: What to expect

The themes that dragged stock prices lower in 2022 aren't going away any time soon and seem to continue to be the factors affecting stock markets next year.

Inflation and US central bank rate hikes continue to be the dominating factor influencing investor mindset.

In the short-term, investor focus would be on the ongoing quarterly earnings season to judge how companies have performed in this high inflation and high interest rate environment.

To summarize, the US central bank interest rate decisions, the US economy’s inflation rate and how corporate America performs in the subsequent quarters are factors to look ahead to in 2023.  

US Stocks 2023: Analysts' outlook

Analysts at IG Wealth Management are more confident towards US equities going into 2023. At the same time, they also feel the probability of an economic recession in Canada and the United States is more likely and hence expect to see peaks and troughs in inflation, interest rates and economic activity.

Analysts at Charles Schwab  are also confident that the US equity market will stage a comeback next year. However they expect that some amount of weakness before markets begin to get better. In other words, there may be more choppiness, given that inflation is still a noticeable (although receding) problem, but the long-term US economic outlook has improved.

This is not investment advice. Investments in the securities market are subject to market risk, read all the related documents carefully before investing. Past performance is not indicative of future returns.