The Pros Got It Wrong: How The Big Calls For 2023 Are Panning Out

The Pros Got It Wrong: How The Big Calls For 2023 Are Panning Out
Russell Burns

8 months ago7 mins

  • The pros’ end-of-year target prices for the S&P 500 for 2023 look like they’ve been set much too low.

  • Japanese and European stocks have performed better than a lot of the experts expected, and the 60/40 portfolio has had a surprising rebound too.

  • Investor sentiment gauges have hit “extreme greed” territory, with bullish sentiment at its highest levels in a year, so be wary of a pullback in markets.

The pros’ end-of-year target prices for the S&P 500 for 2023 look like they’ve been set much too low.

Japanese and European stocks have performed better than a lot of the experts expected, and the 60/40 portfolio has had a surprising rebound too.

Investor sentiment gauges have hit “extreme greed” territory, with bullish sentiment at its highest levels in a year, so be wary of a pullback in markets.

Mentioned in story

Every January, the best-known names across Wall Street release their predictions for the coming year. They usually make headlines for a while, and then mostly get forgotten. But this year’s been a banger, and a lot of those experts have been updating those forecasts. So, as we rush up to 2023’s halfway mark, it seems like a great time to take a look at how the big calls for this year are panning out, how they’re changing, and what to look for as we head into the second half…

What were the big calls for 2023?

For US stocks:

When we started the year, the outlook for the US stock market was grim across the board, with Wall Street’s big banks saying that the S&P 500 was bound for losses. BNP Paribas had the dreariest outlook, expecting the benchmark US stock index to close out the year around 3,400, while Deutsche Bank had the rosiest outlook, expecting only 4,500 – but the rest were mostly clustered around the 4,000 mark. The index has sailed past that mark, of course: it’s above 4,400.

And it wasn’t just “sell side” institutions that were cautious: the big fund managers were on tenterhooks too. Fidelity thought a recession in the US was all but inevitable in 2023; BlackRock and Blackstone were fretting about the economy and the stock market. It was widely assumed the S&P 500 could take a 20% tumble.

In February, 65% of professional forecasters predicted that a US recession would happen in the next 12 months. Many thought a “hard landing” for the US economy had become an inevitable consequence of the aggressive string of interest rate hikes from the Federal Reserve (the Fed). Institutional investors reflected that mood – holding overweight positions in defensive stocks, higher-than-usual cash levels, and an overall preference for bonds – both corporate and government – over stocks.

Then, of course, came the current rally, which left most end-of-year S&P 500 targets way off the mark and had some of the pros scrambling to revise their forecasts. Goldman Sachs upped its year-end target to 4,500, for example, but Morgan Stanley said it’s sticking with its 3,900 target. Bank of America, meanwhile, appeared to be hedging its bets, with its global strategist abiding by an earlier bearish call for US stocks, and its US strategist increasing an earlier target, but only to 4,300. With twice as many calls, there’s a better shot that Bank of America might actually nail this, after all.

For Europe, the UK, and Japan:

At the start of the year, a lot of analysts were leaning in favor of European and Japanese stocks, drawn by how cheap their valuations were, compared to US equities. But they were also plenty worried about the potential for a nasty recession in Europe and the UK, a repercussion of the energy crisis sparked by the Ukraine war. Fidelity, for example, was warning that a recession was “near certain” in Europe and the UK.

Fortunately, an unseasonably warm winter saw stronger-than-expected economic growth in the bloc, and that – along with those cheap valuations – drew investors to Europe’s stocks. The Euro Stoxx 50 Index is up 16% so far this year or 18%, when priced in US dollars.

In Japan, the story was a little different: expectations for investor-friendly corporate governance reforms and some hotter-than-usual inflation (rather than the country’s usual deflation) have supported the stock market. What’s more, the country is also enjoying a massive “Buffett effect” lately. Legendary investor Warren Buffett had been betting big on Japan and added to his holdings in Japanese trading companies again just this week. Those trading companies are the best-performing sector in Japan and are up 40% since January 1st, with Buffett’s stock holdings up as much as 61%. And that’s somewhat surprising as the prices of commodities like oil, copper, coal, and iron ore – which are the usual driver of those companies’ profits – have been pretty weak all year. In the US, for example, the metals and mining sector is up only 1%.

So it’s been a grand year for stocks in the “land of the rising sun”: its Topix Index is up 29% in yen terms so far this year, but is up only 20% in US dollar terms.

For emerging markets:

China’s outlook at the beginning of the year was both sweet and sour. The world’s second-biggest economy was still saddled with geopolitical risks and huge debt levels, but an earlier-than-expected post-pandemic reopening boosted sentiment, giving a welcome boost to European luxury goods companies in the process.

Still, China’s economic and stock market performance have come in well below expectations for the first half of this year. The iShares MSCI China ETF (ticker: MCHI; expense ratio: 0.58%) is down 9% over that time. But the Chinese central bank’s recent decision to cut interest rates, plus hopes for further economic stimulus from the Chinese government, have put a spring in the steps of some of the world’s more cyclical assets – think: metals, mining, and autos – which could bode well for the second half of the year.

But not everyone pinned their hopes on China’s reopening at the start of the year. Morgan Stanley, for example, liked India better, in part because of its stronger growth outlook and favorable demographics. And it’s held up a bit better. The India Sensex index has made some small gains – not quite 4% – this year.

For the 60/40 portfolio:

The time-tested 60/40 portfolio (60% invested in stocks and 40% in Treasury bonds) had its worst-ever year in 2022. And a lot of people thought the threat of stagflation – high inflation and low growth – was going to make 2023 just as challenging. But not everyone: analysts at UBS had a more positive outlook. They’re looking pretty smart now: a portfolio with 60% invested in the Vanguard Total Stock Market ETF (VTI; 0.03%) and 40% invested in the Vanguard Total Bond ETF (BND; 0.03%) would have returned 9.6% so far this year, according to Portfolio Lab.

What’s the opportunity then, for the second half of 2023?

After reviewing the forecasting performance of Wall Street’s biggest names in the first half of this year, you might conclude it’s better not to bother trying to forecast index levels in six months’ time. Still, the outlook for US stocks is rosier now than it was six months ago. And that’s worth noting, if only because that optimistic sentiment may end up being a sell signal in itself.

The AAII Investor Sentiment Survey, which measures investor sentiment on US stocks, just posted its most bullish weekly reading in the last year at 45.2%, with bearish sentiment falling to its lowest since July 2021.

And the CNN Fear & Greed Index reached 82 (out of 100) signaling “extreme greed” in the market. When market sentiment is this bullish or greedy, it often pays to be wary of a potential pullback.

Stocks from Europe and Japan still look reasonably attractive. Japanese stocks are still enjoying a healthy bounce, thanks to the improvement – real and expected – in shareholder returns, and those still-cheap valuations. European stocks, meanwhile, should continue to benefit from their cyclical exposure to China, especially as interest rate cuts and other stimulus moves get the country’s consumers spending again.

And then there are bonds. With inflation potentially falling back to more normal levels, and interest rates likely close to peaking in the US, bonds – both government and highly rated corporate ones – do look attractive. Basically, the 60/40 portfolio seems to have regained some of its merit, after its strong performance this year.

If you were holding a 60/40 portfolio comprised of just two ETFs at the beginning of the year, with 60% in the Vanguard Total Stock Market ETF (VTI; 0.03%) and 40% in the Vanguard Total Bond ETF (BND; 0.03%), the strong performance of the stock ETF will have thrown your balance out of whack and driven your allocation to stocks too high. So that means it’s time to consider rebalancing, switching some of your money from the stock ETF to the bond ETF, to return to your targeted 60/40 weighting.

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