us stock markets

2022 has been a tough year for US stock markets. While Citi expects US stocks to recover somewhat in the fourth quarter of the year, it is predicting a down year in 2023.

US stocks began 2022 on a positive note with Apple’s market cap rising to $3 trillion on the first trading day itself. However, markets plunged thereafter, and the S&P 500 had its worst first half in five decades and fell almost 10% in September as well.

While US economic growth outlook is worsening and even the Big Tech companies are witnessing a slowdown, the Federal Reserve has signaled that it would continue with its rate hikes.

The US central bank has raised rates five times this year including three consecutive hikes of 75 basis points.

US Stocks Fall amid Fed’s Rate Hikes

The Fed hasn’t tightened such aggressively in decades and a lot of Americans, especially the millennials got used to low interest rates. US interest rates were zero bound between 2008 and 2015. In December 2015, then Fed chair Janet Yellen began the process of reverting to a more normalized rate environment.

The Fed has raised rates by 3 percentage points this year and the current Fed fund rate of 3-3.25% is the highest since 2008. Looking at the dot plot, the Fed might announce yet another 75-basis points rate hike this year.

However, FOMC members see rate hikes slowing down in 2023 and the median estimates call for interest rates at 4.6% next year which would mean only one rate hike of 25 basis points. That said, these are only projections, and the Fed would look at emerging data points before deciding on future decisions.

Growth stocks have crashed this year amid the rise in Treasury yields. However, there are some investments that can outperform during inflation.

Citi Expects US Stock Markets to Rise in the Fourth Quarter

Citi has lowered its 2022 S&P 500 target from 4,200 to 4,000. However, even the new target price implies a decent upside in the last quarter of the year. To be sure, Citi is not the only brokerage that has cut the 2022 prediction for the S&P 500.  Goldman Sachs, UBS, and Deutsche Bank have also trimmed their targets amid the economic turmoil.

While lowering its prediction for the S&P 500, UBS also lowered the index’s 2022 EPS estimate to $228 and the 2023 estimate to $235. Among others, a stronger US dollar is a headwind for corporate earnings.

While many would fancy the chances of a rebound in US stock markets in 2023, Citi said that it expects the S&P 500 to end 2023 at 3,900. It said, “The implication is that we see upside to year end, and a flattish environment for ’23, even as recession conditions are expected for 1H ’23.” The brokerage added, “Although the earnings growth outlook for ’23 looks aggressive, we continue to argue that a mild recession impact on earnings may be less severe than feared.”

S&P 500 Might Fall More in Case of a Severe Recession

Citi has put a 20% probability of a severe recession. If that were to happen, it expects the S&P 500 to fall to 3,250 by the end of 2023. Notably, even Apple, whose stock held off well after the June sell-off, has been feeling the pressure from the economic slowdown and has reportedly put on hold the planned production increase for iPhone 14.

Apple is still the best-performing FAANG stock of 2022. Berkshire Hathaway, which is the second largest Apple stockholder added more shares in the first half of 2022. While Berkshire already has a humongous position in the company, Warren Buffett capitalized on the fall and bought more Apple shares.

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