A Favorable Skew for U.S. Equities
Despite placing even odds (45-55%) to a recession in the U.S. this year, our Investment Strategy Group assigns a combined 70% probability to favorable equity outcomes in 2023. Here are two factors supporting this view.
First, stocks are forward-looking, meaning they typically fall in anticipation of a deteriorating economic environment but begin recovering even as earnings are still being downgraded. During past bear markets, equities have typically troughed six to nine months before earnings reach their low. Equities have also typically bottomed about three months before the end of recessions. Put simply, markets bottom when the news is still bad.
Breaking down the combined 70% probability for favorable equity outcomes in 2023, ISG assigned 50% probability to a preliminary base case of the S&P reaching 4,200 to 4,300 by year-end 2023. ISG also assigned a 20% probability to a preliminary good case (4,800), reflecting lower-than-expected inflation and better-than-expected growth.
Second, when equities have already suffered a significant drawdown, as is the case today, returns in the following six to 24 months have been well above average. This upside is even more significant when the drawdowns happen before a recession begins. Furthermore, given the rarity of two consecutive down years for the S&P 500, history also suggests 83% odds of a gain in 2023.
Investment Strategy Group (“ISG”). The Investment Strategy Group, part of the Asset & Wealth Management business (“AWM”) of GS, focuses on asset allocation strategy formation and market analysis for GS Wealth Management. Any information that references ISG, including their model portfolios, represents the views of ISG, is not financial research and is not a product of GS Global Investment Research and may vary significantly from views expressed by individual portfolio management teams within AWM, or other groups at GS.
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