#103 – 2023? Implications for Profits and Equity Markets

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#103 – 2023? Implications for Profits and Equity Markets

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Equity Markets – In this article you’ll find:

  • What kind of recession we can expect for the entire year
  • How profit could impact the businesses and the economies
  • How stage 1 and stage 2 of bear market could help us in the long run
  • And How S&P has already behaved in the past with the same situation


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  2. Is The Fed Monetary Policy Thinking To Pivot Their Way?
  3. We Are Far Away From The End Of The Dollar


Introduction (Equity Markets)

We’re going to the end of the year and each of us is starting to ask what happen in 2023.

The GDP forecasts is not encouraging, and we see as 2023F for advanced economies such as US, Eurozone and UK with minus signals for the entire year.

-0.1 from 1.8 for the US / -0.8 from 3.2 for the Eurozone and -1.0 from 4.2 for the UK.

What does this mean for the businesses and for the economies?

Easy, decline in profits. For this reason, in this research let’s see how profits could slow over the year and which impact could we expect on the stock market with historical data.

A 21% decline in profits would cause 2023 earnings to miss consensus expectations by 32%.

A soft landing would see profits fall 8% by the end of 2023, a miss of 20% vs consensus.

But again, depending on how slowly these misses are realized, the actual drop in forward earnings may only

Let’s see even thanks to Morgan Stanley paper how stage 1 and stage 2 of bear market could try to help us correctly analyze the market’s status now.

For concluding I’d say that the 2023 is not figuring at the best scenario ever, but as we know with the past the markets is always unpredictable and I’m sure they continue to be, so keep high your attention on it.


The risk of a recession has inevitably increased as we turn to prospects for 2023. There are a range of factors that could cause output to shrink over the coming quarters.

One of the primary risks to growth is a further de-anchoring of inflation expectations, which would force policymakers into hiking rates further into restrictive territory.

Equity Markets

Conversely, the potential for policy mistakes from overly vigorous central bankers could also hit growth prospects.

Further downside risks could emanate from an intensification of the war in Ukraine, an escalation of energy crises, and a harsher than-expected slowdown in China.

Meanwhile, higher rates and the stronger US dollar have started to create headwinds for emerging market finances.

Macro Insight (Equity Markets)

In the past three months, as inflation has reached 40-year highs, another worry has begun to seriously buffet financial markets: the increasing probability of a U.S. recession.

The Global Multi-Asset (GMA) of Morgan Stanley team recently increased its estimated probability of a recession to 55%.

Negative Real Rates for Nearly Fifteen Years – Likely Positive by 2023

Equity Markets

Historically, the U.S. economy has never been able to avoid a recession when faced with an oil shock, a monetary tightening cycle and fiscal contraction.

All soft landings occurred with only one or two of these three drags but never all three. And there will be no cushion coming from global demand given China’s weakness and Europe’s likely recession.

What?? (Equity Markets)

Equity Markets

There is still the probability that inflation begins to decelerate faster than most expect.

A recent San Francisco Fed paper calculates that nearly half the post pandemic acceleration seen in April 2022 has been supply driven and a bit more than a third demand-driven (with the rest being “ambiguous”).

Implications for Profits and Equity Markets

Analysts expect profits for the S&P 500 companies will grow by 10% in 2022 and in 2023.

Equity Markets

However, if Morgan Stanley expectation of a recession proves to be correct, their models indicate that trailing 12-month profits will likely shrink by 21% by the end of 2023.

Interestingly, the median profit decline in recessions since 1970 was 21% (trailing 12-month peak to trough) with only 14% nominal profit declines in the 1970s and 1980s, and 28% median decline in recessions since 1990.

Stage 1 of bear markets

Equity Markets

The U.S. equity market’s 24% decline from the peak on January 3 to the trough on June 16 was entirely the result of a 29% multiple compression as forward earnings actually rose 8% so far this year.

Multiples entered the year at 21.6x forward earnings per share (EPS) and troughed in mid-June at 15.4x. We view this multiple compression as Stage 1 of the bear market, one driven by the change in the price of money (i.e., Fed funds rate).

Stage 2 of bear markets

As the price of money started rising (with expectations of much more to come), the price of all other assets fell.

In Stage 2 of the bear market, earnings will fall in absolute terms and more importantly, compared to expectations, which will trigger a second decline in equity multiples, driven this time not by the price of money but by a higher equity risk premium: historically, as earnings fall, multiples fall as well, as investors worry about the depth of the eventual decline in profits.

The decline in equity multiples which could take the S&P down to 13.5x forward EPS is likely to occur faster than the forward EPS decline.

Overall, Stage 2 could see equities fall a further 20%, for a cumulative decline of 40% from this January’s peak.

A 40% decline would be exactly in line with the median market decline in recessions starting in 1900.

Very few investors appear to be pricing in this scenario despite the apparent prevalence of recession forecasts.

 Important Considerations

  • By Barclays 2023 looks like being another difficult one for investors. At a time of slowing growth, sky-high inflation, and punchy interest rates, investors and the authorities will need to tread carefully.
  • That said, new investment opportunities have emerged, keeping us constructive over the medium term.
  • They expect inflation to peak in the coming months, and anticipate global consumer prices (CPI) will remain above the target level in many of the major regions.
  • Global CPI will average 4.6% in 2023, but with prints becoming more digestible as the year progresses.

Equity Markets

Join the conversation with your own take on these topics in the comments below.

About the Author

Alessandro is a Financial Markets enthusiastic and he loves learning from articles/papers on many financial topics.

In doing so he shares with you the most interesting charts and comments.


This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. 

It has been prepared for informational purposes only. 

Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation.

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