- JPMorgan strategists expect US stocks to retest this year's lows in the first half of 2023.
- But later in the year, the Fed will signal a pivot that lifts the S&P 500 to 4,200 by the end of 2023, JPMorgan added.
US equities are likely to drop through the first half of 2023 as the Federal Reserve continues its aggressive fight to dampen inflation, then stage a rebound as the central bank changes its tone, according to JPMorgan.
The investment bank expects the S&P 500 to retest this year's lows as the Fed overtightens the US economy amid weaker fundamentals. In October, the index notched a yearly low at 3,491, but has since rebounded back above 4,000.
"Fundamentals will likely deteriorate as financial conditions continue to tighten and monetary policy turns even more restrictive (Fed raises rates by another 75-100bp with an additional ~$1T in QT), while the economy enters a mild recession with the labor market contracting and unemployment rate rising to ~5%," Dubravko Lakos-Bujas, chief US equity strategy at JPMorgan, wrote in a Thursday note.
But after that sell-off, disinflation, rising unemployment, and weaker corporate sentiment should prompt the Fed to signal a pivot that lifts the S&P 500 to 4,200 by the end of 2023, JPMorgan added.
The firm expects a disinflationary environment to emerge from the Fed's quantitative tightening, a strong US dollar, significant wages growth declines, and a softening housing market.
Meanwhile, unemployment levels will rise due to the higher cost of capital from interest rate hikes, while the US enters a mild recession next year, JPMorgan added.
And corporate sentiment will suffer as forecasts for revenues and profit margins come down, analysts predicted, while cutting their 2023 S&P 500 EPS forecast to $205 from $225 on "restrictive monetary policy, evaporating consumer savings, and elevated geopolitical risks."
Additionally, markets should expect increased volatility next year, with the VIX averaging about 25, JPMorgan said.