The Bear Market in Global Stocks is Forecast to Get Deeper in 2023

The bear market in stock markets is predicted to intensify before giving way to more optimistic signs later in 2023, according to Goldman Sachs Research.

The MSCI All-Country World Index of global equities has fallen by around 19% this year. Even as stocks have risen slightly since the summer, our strategists forecast more volatility and declines during this bear market before bottoming out later in 2023. They expect interest rates to peak and economic growth to decline prior lasting in equity. he succeeds.

The fundamentals driving the global equity market have changed dramatically, writes Peter Oppenheimer, chief global equity strategist and head of macro research in Europe. In the team’s Outlook 2023, he pointed out that, in contrast to previous years, the cost of capital has increased significantly, which has affected valuations for fast-growing companies that are expected to realized profits in the future. The earnings of major technology companies have fallen behind analysts’ expectations.

Higher interest rates and commodity prices make high-quality companies with reliable profits and cash flow more attractive. “The relative success of traditional incumbents and new digital entrants in many industries has changed a lot,” our strategists wrote. They favor companies with high dividends, strong balance sheets and high margins.

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At the same time, investors may have to contend with a permanent bear market. There are two main types – “cyclical” ones driven by a slowing economy and rising interest rates, and “structural” ones driven by a shock like an asset bubble or crash, according to Goldman Sachs Research. The downturn is the cyclical type, which usually lasts 26 months and takes 50 months for stocks to recover. Equities typically fall 30% and have short rallies before the market bottoms in these cycles.

There are a few key reasons why our strategists think stocks could decline further. Although valuations have declined this year, they started from a very high peak amid ultra-low interest rates. While many equity markets around the world are trading at low valuations, US stocks are not – American equity valuations remain at levels consistent with the peak of the tech bubble in the late 1990s.

Part of the difference in valuations is likely explained by better prospects for US economic growth and a stock market with a different mix of companies. But even with that in mind, GS Research says it’s hard to justify why the US market is trading in line with its 20-year average. This is especially so when the margins of large technology firms are under pressure, resulting in job cuts and reduced investment. And in the meantime, yields on government and corporate bonds have risen enough that they are becoming a competitive alternative to equities.

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Historically, the best time to buy stocks is when economic growth is weak but nearing stabilization. But while the outlook for expansion is expected to improve later this year, that hasn’t happened yet. “Timing is everything,” according to strategists at Goldman Sachs Research. “A weak economy that is still deteriorating is very different from a not-so-bad economy.”

Goldman Sachs Research forecasts recessions in Europe while the US narrowly avoids a downturn. But even if the world’s largest economy continues to grow, our equity strategists say there is a strong risk that investors will be more likely to pull back in the US before stocks bottom out. Their base case is that earnings are flat in 2023.

The peak in interest rates is likely to be bullish for stocks. However, our strategists think there is still room for bond yields to rise, in part because US policymakers are focused on keeping financial conditions tighter to help keep inflation under control. It is not yet clear how long rates will remain high before central banks are ready to lower borrowing costs. Economists at Goldman Sachs do not expect any rate cuts from the US Federal Reserve in 2023.

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The position of investors, meanwhile, shows that the market is not yet reached. By some measures, investors have become more defensive and have repositioned their portfolios to take less risk, but flows into equity funds remain strong, particularly in the United States. stocks reach bottom.

The global stock market’s “hopeful” phase could begin later this year, according to Goldman Sachs Research. These recoveries usually start during a recession as valuations go up. Historically it has been better to invest in stocks immediately after the bottom than immediately before: the average 12-month return is higher one month after the tank than one month before. “For this reason, we think it is too early to settle for a possible transition in the bull market,” Goldman Sachs strategists wrote.

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