Wall Street? Stop at 4 thousand points. Actions? They’ll be back in fashion in the summer – Corriere.it

The big investment houses are always cautious when they churn out forecasts for the following year in December. This time they are even more cautious than usual and extraordinarily in agreement: because, if we neglect the two most extreme estimates, the price targets imagined for the S&P 500 index at the end of 2023 are all very similar. From the 17 analyzes taken into consideration, an average of just over 4 thousand points was obtained, coincidentally the same level reached by the index a few days ago. On Wall Street, it seems to be understood, next year will be at or near zero growth. However, this great homogeneity hides a deep uncertainty and a widespread hope.

In fact, if no one feels capable of predicting the performance of the economy, the duration of the Fed’s monetary tightening, corporate profits and, therefore, the behavior of the Stock Exchange, the large strategist they seem to have agreed on the assumption that there will be a recession, but it will turn out to be mild and soft, almost painless, although there have been very few gentle recessions in the past. In announcing it almost unanimously, something never seen before, to the point that several investment bank economists had not even noticed it was there when it was already raging, an attempt is made to exorcise it and the result, which this time will be different: two quarters of barely negative GDP, followed by an imagined robust recovery such as to end the year with an economy in progress of 0.4%, as can be deduced from the average of the forecasts of the 9 major international banks.

It follows that Wall Street will also have a bumpy ride: down in the first half of the year, with the index falling to 3,000-3,300 points and then recovering strongly, up to over 4,000 points or even 4,500 hypothesized by Deutsche bank. In Bank of America recommendations, you will have to bet on bond and government bonds in the coming months to switch to equities in early summer. Even the optimist Goldman Sachs now seems to be conceding that, on Wall Street, we could revise the lows of the beginning of October (3,577).

Forecasts for the Eurozone are similar to those for America with the difference that the recession is already underway here, 4-5 months earlier than in the United States. But, despite the cost of energy about 5 times higher than in America, the recession will also be soft, indeed very soft: for the Eurozone it would result in growth equal to zero in 2023 (-0.1% according to Goldman Sachs and zero for Bofa) and would hit almost only Germany (GDP -0.4%) and Italy (-0.2%). Obviously the official forecasts, those of the central bank, the EU, the rating agencies or the various governments, are much better. But, it should be noted that the estimates of the investment banks are also becoming less pessimistic and the performance of the European Stock Exchanges in the last two weeks proves it, more promising than Wall Street. By analogy with the S&P500, the Stoxx index would drop to 408 mid-year (-7% compared to Wednesday’s close) to find itself at 434 in December, according to a Reuters poll two weeks ago. But, in the most recent Bloomberg survey, it would rise to 449 points with a modest appreciation (2.7%) compared to today. Strange to say, but for the European markets the low at the end of September (383 points) would be just a memory.

History

How much these predictions are worth, history says. In the Philadelphia Fed’s thorough poll, the odds of a recession are at 63%, an all-time high. But, if now almost all the economists and investors interviewed say they expect it, it is not clear why almost nobody had foreseen it in 1990, 2001 and 2008, when less than 22% of those interviewed considered it probable.

Even worse is the reliability of the various estimates strategist on market trends. In December 2019 they underestimated the S&P index target by 15%; in 2020 they missed it by 18% and in 2021 they missed it by a generous 22%. They imagined the Fed rate at 0.87%: 3.5 percentage points less than what will be set the day after tomorrow. The only indication one gets from these forecasts is the current mood and what one now perceives as a moderate confidence that things will be better in six or seven months.

It is no coincidence that, this year, several banks indulged in painting three scenarios: one considered basic, to which probabilities around 50% are attributed, one pessimistic and another optimistic. Goldman Sachs, UBS, Morgan Stanley, T Rowe and BofA made particular efforts in this year. Let’s take for example the analysis of the latter, precisely the house that together with Morgan Stanley had partially predicted the performance of Wall Street in 2022. The S&P index, specifies Savita Subramanian, head of American stocks, should finish in 12 months at 4,000, if all goes according to forecasts. But if all goes wrong it would plummet to 3,000 and if things go better than expected it would plummet to 4,600. A good 53% passes between the minimum and maximum objective and with this artifice BofA covers the entire spectrum of possibilities.

It is often the details contained in the analyzes that leave us a little perplexed. In estimating the trend in corporate earnings, half a dozen banks, including BofA and Goldman, illustrate that in previous recessions, profits have fallen by an average of 20-30%. But this time, while portraying the worst case scenario, they hypothesize a drop of just 9-10%, justifying it with a series of arguments, the common denominator of which is different this time. The same refrain that so many times strategist and economists had repeated in 2008, before the great crisis.

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