Survey: Pros expect modest rally in stocks over the next year despite growing recession fears

The stock market is likely headed for its worst year since the great financial crisis in 2008, with major indices such as the S&P 500 and Nasdaq Composite down about 19 and 32 percent, respectively in 2022. But investment professionals surveyed in Bankrate’s Fourth-Quarter Market Mavens survey see some relief coming investors’ way in 2023. The group of analysts expect the S&P 500 to increase 8 percent over the next 12 months, the ninth straight quarter the group has predicted gains.

Survey respondents predict the S&P 500 will rise to 4,243 over the next year, up from 3,934 when the survey period ended on Dec. 9, 2022. The experts strongly prefer U.S. stocks over international markets, and value stocks over growth stocks.

“If respondents are correct and the stock market rallies over the coming year, that would likely be coinciding with at least several other positive developments, namely lower inflation, and a less aggressive Federal Reserve,” says Mark Hamrick, Bankrate’s senior economic analyst. “Uncertainty remains highly elevated, however, for the coming months, and that includes the investing environment.”

“For most investors, slow and steady wins the race,” Hamrick added. “While there’s intense interest in the daily movements of the stock market and individual issues, most mere mortals aren’t capable of successfully timing the market. That’s why staying invested is key for long-term investors.”

Forecasts and analysis:

This article is one in a series discussing the results of Bankrate’s Market Mavens fourth-quarter survey:

• Pros expect modest rally in stocks over the next year despite growing recession fears
• 10-year Treasury yield to rise even higher over the next year, experts say
• Here’s when pros see the next bull market arriving and whether crypto can make a comeback

Stocks expected to bounce back over next year

Stocks have had a difficult year, with both the S&P 500 and Nasdaq in bear market territory, while the Dow Jones Industrial Average is down about 9 percent in 2022. Investors have pulled back on risk as the Fed raises interest rates to combat high inflation and concerns grow that the economy is headed for a recession. Inflation has softened somewhat recently, but the Fed hiked interest rates by half of a percentage point at its latest meeting in December.

While the group of experts has been steadily positive on stocks throughout 2022, the fourth-quarter survey saw their enthusiasm diminish. They expect the S&P 500 to increase 7.8 percent over the next 12 months, compared with 11.9 percent in the third-quarter survey and 12.3 percent in the second-quarter survey.

“We see a recession in the first half of next year, which will bring inflation down, and allow the Fed to cut rates in the second half,” says Sameer Samana, senior global market strategist at Wells Fargo Investment Institute. “That should allow equities to bottom in the first half and begin looking towards an economic recovery.”

But other analysts think it will take longer before the Fed starts cutting rates.

“The market is mispriced if the Fed continues raising interest rates as they have suggested and recent economic data implies is necessary,” says Charles Lieberman, chief investment officer at Advisors Capital Management. “Inflation is not likely to moderate quickly, so rates have to get higher and stay higher for longer. So, the rate reductions needed to unleash the economy likely need to wait until 2024.”

Most experts see five-year stock returns consistent with historical average

The survey’s respondents overwhelmingly expect returns over the next five years to be in line with historical averages. Fewer experts expect higher-than-normal returns over the next five years than they did in the previous survey.

Here’s how the numbers break down:

• About 64 percent of respondents say returns will be about the same as their historical average over the next five years.
• About 29 percent say returns will be lower than long-term returns.
• About 7 percent say returns will be above the historical average.

The results show a decline in the experts’ outlook compared to the previous survey when about 27 percent expected returns to be higher-than-normal over the next five years.

“With valuations still close to historical averages, and a recession ahead of us, returns will be close to the historical average,” according to Samana.

Briefing.com Chief Market Analyst Patrick O’Hare agrees. “We are on a path to normalization, albeit a bumpy one, but with the Fed put being retired and animal spirits being tamed because of that, returns should be closer to their historical average,” he says.

But other analysts think slower growth will hinder stocks and lead to returns being below average over the next five years.

“Economic and earnings growth rates are likely to be somewhat lower than historic averages,” says economist Hugh Johnson, which he thinks will lead to underperformance for the stock market relative to its long-term average.

U.S. stocks remain heavily favored by analysts over international stocks

The survey’s respondents still largely prefer U.S. stocks over international stocks for the next 12 months. Here’s a breakdown of the responses:

• About 71 percent of respondents favor U.S. stocks in the coming year.
• About 21 percent prefer international stocks.
• Around 7 percent said the returns between the two would be about the same.

In the previous quarter’s survey, 91 percent preferred U.S. stocks, 0 percent favored international stocks and 9 percent said the returns would be about equal.

Though most analysts prefer U.S. stocks, that is at least partly due to the belief that a U.S. recession next year will have a meaningful impact on international economies.

“If the U.S. suffers a recession in 2023, other global economies will be feeling the effects of that,” says O’Hare. “China is an outlier that could outperform the U.S., should it actively distance itself from the zero-COVID policy, but all else equal, the U.S. market should continue to win favor for its rule of law, deeper liquidity, and residence for global industry leaders that have the financial wherewithal to ride out a challenging economic environment.”

Michael Farr, chief market strategist at Hightower Advisors, also sees the U.S. outperforming international markets. “The U.S. will be the least bad house in a tough neighborhood,” he says. “Global economies will continue to battle inflation, Ukrainian war pressures and an ongoing slowdown in China.”

Dec Mullarkey, managing director of investment strategy and asset allocation at SLC Management is one of the few analysts who predict international stocks will outperform the U.S.

“Expect U.S. equities to deliver modest returns as growth and earnings level off,” says Mullarkey. “But global equities (ex U.S.) should do better with help from attractive valuations and a weaker dollar as Fed rate hikes level off.“

Experts like value stocks over growth stocks in the coming year

In a change from the third-quarter survey, analysts now strongly expect value stocks to outperform growth stocks over the next year. The preference for value stocks reflects concerns that a recession may be coming and earnings growth for growth stocks may be under pressure.

Here’s a breakdown of the responses:

• About 71 percent of respondents prefer value stocks to growth stocks over the next year.
• About 21 percent favor growth stocks to outperform value.
• About 7 percent think returns will be about the same.

This is the eighth out of the last nine quarters where value stocks were preferred over growth stocks.

“Economic growth will be subpar and divergent as higher rates mute activity and varying geopolitical challenges take a toll,” Mullarkey believes. “Subsequently, earnings will get pinched resulting in defensive and value stocks outperforming growth.”

“During difficult economic times, companies that sell things people need hold up better,” says Hightower’s Farr. “These are not the high-growth companies.”

Other analysts see a greater upside for growth stocks, as the potential for a rebound or new bull market develops in 2023. Growth stocks have dramatically underperformed value stocks throughout 2022.

“The sectors that have fallen the furthest in a bear market tend to outperform the market in the first 12 months of a new bull market,” says Sam Stovall, chief investment strategist at CFRA Research.

Methodology

Bankrate’s fourth-quarter 2022 survey of stock market professionals was conducted from Dec. 1-9 via an online poll. Survey requests were emailed to potential respondents nationwide, and responses were submitted voluntarily via a website. Responding were: Jim Osman, founder, The Edge Group; Dec Mullarkey, managing director, SLC Management; Sam Stovall, chief investment strategist, CFRA Research; Michael Farr, CEO, Farr, Miller & Washington; Hugh Johnson, chief economist, Hugh Johnson Economics; Patrick J. O’Hare, chief market analyst, Briefing.com; Chuck Carlson, CFA, CEO, Horizon Investment Services; Louis Navellier, CIO, Navellier & Associates, Inc.; Kim Forrest, chief investment officer/founder, Bokeh Capital Partners; Charles Lieberman, managing partner and chief investment officer, Advisors Capital Management; Kenneth Chavis IV, CFP, senior wealth manager, LourdMurray; Sameer Samana, senior global market strategist, Wells Fargo Investment Institute; Brad McMillan, chief investment officer, Commonwealth Financial Network; Marilyn Cohen, CEO, Envision Capital.

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.