Wall Street's 2023 earnings estimates are starting to roll in, and they're not bullish for the stock market

• Over the long-term, corporate earnings growth and stock prices have a direct relationship.
• Goldman Sachs downgraded its outlook to 0% earnings per share growth for the S&P 500 next year, and they could get worse.
• "In a recession, we expect S&P 500 EPS would fall by 11%," Goldman Sachs' David Kostin said.

The stock market could be set up for another rocky year in 2023 if earnings estimates from Goldman Sachs and Bank of America pan out.

Goldman Sachs downgraded its 2023 earnings growth outlook to 0% for the S&P 500 — and that's only if a recession doesn't hit the US economy.

"In a recession, we expect S&P 500 EPS would fall by 11%," Goldman Sachs' equity strategist David Kostin said in a Friday note. The bank expects the S&P 500 to generate $224 in earnings per share for 2023, down from its prior estimate of $234.

Over the long-term, corporate earnings growth and stock prices have a direct relationship, so if earnings aren't growing, there's a good chance stock prices aren't either, at least until the outlook begins to improve.

"Our economists forecast real US GDP growth will slow from 1.9% in 2022 to 1.0% in 2023. Our forecast for 0% EPS growth in 2023 is consistent with the historical relationship between real GDP growth and EPS growth," Kostin explained.

Bank of America's Savita Subramanian is even more bearish than Kostin, as she expects the S&P 500 to generate earnings per share of just $200 in 2023. That's well below Wall Street's consensus estimate of $233.

"Pricing is peaking, demand is slowing, yet costs are sticky. Our Corporate Misery Indicator remains well off its highs (more miserable), pointing to increased margin pressure. Demand is key, which was the main driver of pricing power post-COVID. Weakening demand should translate to weaker pricing and margin pressure," Subramanian said in a Monday note.

Much of the weakness in earnings growth next year is likely to come from the technology and consumer discretionary sectors, according to Subramanian, as higher interest rates and weaker fundamentals create a "perfect storm."

Meanwhile, Kostin expects the financials sector to post the fastest earnings growth next year, with utilities and real estate also growing their profits.

Based on the earnings estimate, Kostin expects the S&P 500 to end 2023 at 4,000, which represents potential upside of just 6% from current levels. Subramanian has not yet set a 2023 price target for the S&P 500.