Will stock market bounce back 2023?

There might be light at the end of the tunnel for tech stocks after a rough few months.

Companies like Netflix and Peloton benefited greatly from people spending more time at home during the pandemic. 

But this year, with most COVID-era restrictions in the U.S. lifted and the return of pre-pandemic activities like travel, tech stocks have taken a huge tumble. A murky economic outlook and higher interest rates exacerbated an already bad year for tech stocks, contributing to a massive $1.3 trillion loss in their value in March. Things haven’t gotten much better since then, with last month’s higher-than-expected inflation report leading to $500 billion in lost value for the six largest U.S. tech companies. It sparked the worst two-week stretch for the tech-heavy Nasdaq—down 23% from a year ago—since the pandemic’s early days. 

But as bad as things look for the tech industry now, the tide may be changing. While global economic growth is projected to slow next year, tech stocks might be the exception, according to Citi analysts. 

Next year, as the Federal Reserve begins to stop raising interest rates, investors will likely focus more on growth stocks that have the highest potential for profit, Citi strategists led by chief global equity strategist Robert Buckland wrote in a note to clients Thursday.

Buckland’s team expects global stocks overall to provide an 18% return for investors in 2023, but the road will be bumpy. Next year will likely be “a volatile ride” for investors, according to the Citi analysts.

Tech stocks to bounce back

Interest rates and stock valuations tend to have an inverse relationship, as higher corporate borrowing rates make it less appealing for businesses to invest in their own growth. Speculative or growth stocks including tech can be especially vulnerable to higher interest rates because they depend on the promise that a market will perform well over the long term.

The tech industry’s downturn this year has forced companies including Amazon and Facebook parent Meta to announce hiring freezes or spending cuts, while others such as Netflix and Snapchat parent Snap have already resorted to layoffs.

Last month, the Fed raised interest rates for the fifth time this year, and signaled that it will raise them again before the year is done. The Fed plans on stopping interest rate hikes by March 2023, and Citi analysts say this will be a turning point for stocks.

By the end of next year, Buckland’s team expects that “investor attention will increasingly switch to EPS risks,” referring to earnings per share and company profits.

The analysts added that sectors with greater potential for high earnings, including health care and technology, will take priority among investors. These sectors also perform “reasonably well in a recession,” the analysts wrote.

But volatility will still reign supreme in global markets next year, Citi warned. With the likelihood of a recession in the U.S. growing, a severe enough economic downturn could hit tech stocks, too. 

And if the Fed continues to raise rates past March, it could create sustained headwinds for the tech sector. Last month, Chicago Federal Reserve president Charles Evans said he was “optimistic” about the Fed reaching its peak funds rate in March, but that this target also depends on there being no surprises.

“There could be shocks; there could be other difficulties,” Evans warned.

Sign up for the Fortune Features email list so you don’t miss our biggest features, exclusive interviews, and investigations.

According to Fed Reserve Gov. Christopher Waller and several strategists, last week’s softer-than-expected October CPI that sent the S&P 500 to its best level in five months was overdone.

His words may be getting through as stock futures point to a softer start as the last full week before Thanksgiving kicks off. We’ll also get retail sales data this week.

And it’s that time of the year when Wall Street starts rolling out its 2023 market forecasts, an unenviable task for sure. Our call of the day comes from Morgan Stanley where a team led by top U.S. strategist Mike Wilson sees the S&P 500 SPX finishing next year almost on par with where it is now, at 3,900.

While that might look a little uneventful, the in-between period will be anything but, once Wall Street gets a wakeup call over earnings hopes that are still far too optimistic, the bank says.

“We remain highly convicted that 2023 bottom up consensus earnings are
materially too high,” said Wilson and the team, who revised their 2023 earnings per share forecast down another 8% to $195, which is 16% below consensus and 11% lower annually.

“After what’s left of this current tactical rally, we see the S&P 500 discounting the ’23 earnings risk sometime in Q123 via a ~3,000-3,300 price trough. We think this occurs in advance of the eventual trough in EPS, which is typical for earnings recessions,” said Wilson.

“Equities should begin to process that growth reacceleration well in advance, and rebound sharply to finish the year at 3,900 in our base case,” he said.

As for portfolio moves, Wilson said they remain defensive until those estimates “reflect the bust.” They upgraded staples to overweight and cut real estate to equalweight, leaving overweights also in healthcare, utilities, and defensively
oriented energy stocks. Consumer discretionary and tech hardware are unchanged as underweights.

The eventual silver lining is that a turbulent 2023 may give way to a better 2024, where Wilson and co. see a strong rebound as positive operating leverage growth —- revenue growing faster than expenses — “i.e., the next boom.”

As for where markets stand right now, Wilson cautions investors to stay flexible, referencing the bank’s tactical bullish shift four weeks ago.

“After a 12-month period when being stubbornly bearish paid off handsomely, we think we will now enter the final stages of the bear market where two-way risk must be respected,” he said.

He sees a “window of opportunity when long-term interest rates typically fall prior to the magnitude of the slowdown being reflected in earnings estimates and the economy,” defining it as a late cycle period between the Fed’s last hike and recession.

But remember that they are talking pause here only. “So, while we think there is a window for stocks to run into year-end as the markets dream of a pause,a Fed that is cutting is probably a bad sign that the recession has arrived (negative payrolls),” said Wilson. His chart shows that stocks do not react well to that:

Stocks DJIA SPX are lower, with the Nasdaq Composite out in front, with oil prices CL under pressure, while the dollar DXY is higher after by Fed’s Waller pushed back on that inflation optimism. It was a mixed Asian session, with gains in Hong Kong HK:HSI, losses in Tokyo JP:NIK.

Retail sales, the state of manufacturing in New York and some data on the housing market are in the data spotlight this week. The New York Fed’s 1- and 5-year inflation expectations are due for Monday. Fed Vice Chair Lael Brainard will be speaking later this morning.

Tyson Foods TSN reported profits that missed expectations as margins contracted. The rest of the week will focus on retailers scuh as Walmart WMT and Home Depot HD, on Tuesday, with Target TGT on Wednesday, along with Cisco CSCO and Nvidia NVDA.

The Disney DIS -owned Marvel sequel “Black Panther: Wakanda Forever” saw 2022’s second-best opening weekend, and AMC shares AMC are up in premarket.

“Fix your companies. Or Congress will,” Sen. Ed Markey fires back at Tesla TSLA chief Elon Musk over Twitter owner’s insult. Musk, meanwhile, told a G20 forum that he has “too much work” on his plate.

On the midterm front, Nevada and Arizona wins mean Democrats will hang onto the Senate, with Republicans fewer than 10 wins away from House control.

Former FTX chief executive Sam Bankman-Fried has been sending some puzzling tweets as investors continue to watch for more fallout from his bankrupt crypto exchange. Bitcoin BTCUSD is slightly higher at $16,775.

And: You need to understand what’s going on at FTX, even if you don’t have crypto

In his his first in-person meeting with President Xi Jinping Monday, U.S. President Joe Biden told China’s leader that he objects to any aggression towards Taiwan. And shares of Chinese property stocks soared Monday after Beijing signed off on aid measures for the embattled sector.

Concerns are growing about the health impact of puberty blockers.

Older workers need to stop complaining about your younger colleagues.

Tesla finds a loophole in states where dealerships are forbidden: Tribal lands.

Does the stock market rally have further to go? Watch the 200-daily moving average on the S&P 500, say some.

“That provided very tough resistance in March and August. Therefore, if it can break meaningfully above that line, it will signal that the Q4 rally could/should last through the end of the year,” Matt Maley, Miller + Tabak.’s chief market strategist, told clients in his week-ahead roundup. Here’s his chart:

These were the top-searched tickers on MarketWatch as of 6 a.m. Eastern:

Man finds Haribo’s missing $4.7 million check, gets awarded with gummy bears.

Diver got a rare octopus hug.

Need to Know starts early and is updated until the opening bell, but sign up here to get it delivered once to your email box. The emailed version will be sent out at about 7:30 a.m. Eastern.

Listen to the Best New Ideas in Money podcast with MarketWatch reporter Charles Passy and economist Stephanie Kelton

Will stock market recover in 2023?

Should I pull out of the stock market?