Stock market forecast next 6 months

Despite a parade of recession predictions from Wall Street this year, Goldman Sachs’ strategists still believe a “soft landing” is likely.

But that doesn’t mean stock market investors should celebrate.

The 153-year-old investment bank’s equity research team, led by chief U.S. equity strategist David Kostin, said this week that they believe the S&P 500 will drop roughly 10% to 3600 over the next three months as interest rates rise.

After that, Kostin and his team made the case that the blue-chip index will finish 2023 at 4000—roughly the same level it closed at today.

Their argument is based on the idea that the Federal Reserve’s inflation battle will end by May of next year, which will help boost equity prices from their lows even as global economic growth stalls.

The Fed has raised rates six times this year to fight inflation not seen since the early 1980s. In October, the results of its work started to show when year-over-year inflation, as measured by the consumer price index (CPI), fell to 7.7%, a significant drop from its 9.1% June peak.

“Our economists expect by early 2023 it will become clear that inflation is decelerating and the Fed will reduce the magnitude of hikes and eventually cease tightening,” Kostin wrote in a Monday research note.

But at the same time, with a lack of corporate earnings growth on the horizon and company profit margins facing pressure, Kostin and his team said they “expect less pain but also no gain” for stocks in 2023.

And they warned there is one key risk to their flat-year for stocks thesis—a recession.

“[A] flat return under our base case and [a] large downside in a recession means investors should remain cautious,” they wrote.

A ‘distinct risk’

Here are the facts. Some 98% of CEOs expect a recession within 18 months and 72% of economists polled by the National Association for Business Economics expect a recession within the next year. Meanwhile, 75% of voters believe we’re already in a recession—and billionaires like Elon Musk agree.

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Despite this, Goldman Sachs believes the U.S. economy is strong enough to weather the storm, even if its analysts admit a serious economic downturn “remains a distinct risk.”

If a recession does hit, Kostin and his team argue that corporate earnings would fall 11% next year. For the S&P 500, that would mean a drop to 3150 (-22%) at the low point of the recession.

When is that low point? Kostin and his team didn’t make that forecast but argued that when economic growth data is at its worst, markets typically hit bottom.

They noted, for instance, that in the 12 recessions since World War II, the S&P 500 has “often” bottomed within a few months of the cycle-low of the ISM Manufacturing Index, which is a gauge of economic activity in the manufacturing sector.

Finally, Kostin and his team noted that there will be less appetite for stocks next year due to a reduced number of corporate buybacks, as well as less stock buying among retail investors, which could hurt share prices.

“Buybacks have been the largest and most consistent source of demand for shares for more than 10 years but demand will soften in 2023,” they wrote, predicting a 10% year-over-year decline in corporate buybacks.

Goldman also expects households to be net sellers of stocks for the first time since 2018 next year, with estimated outflows of $100 billion.

This story was originally featured on Fortune.com

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U.S. stocks had a rare winning streak last week after encouraging earnings reports from several companies. But the Federal Reserve’s latest 0.75% rate hike — and the comments that came with it — sent the stock market into sharp swings on Wednesday.

Stocks jumped immediately after the Fed’s press release was published Wednesday afternoon, then fell shortly after. One comment from the press release — “the Committee will take into account…the lags with which monetary policy affects economic activity and inflation” — gave investors hope that the Fed will slow down the pace of future rate hikes.

Then Fed Chairman Jerome Powell said at a press conference that rates would likely end up higher than the Fed originally anticipated. This news sent the market spiraling down.

This latest bout of volatility is yet another sign that investors are uncertain of what will actually happen in the next few months. 

With the September Consumer Price Index (CPI) numbers showing inflation remaining stubbornly high, the Fed has made it clear in past meetings that it intends to make reducing inflation its top priority, even if it comes at the cost of a higher unemployment rate.

“I think we probably are going to be facing a recession because the Fed has explicitly said that’s what it needs,” says Brad McMillan, CIO for Commonwealth Financial Network.

That’s a bleak prediction in what’s already been a tough year for the stock market. The average U.S. mutual fund or ETF is down 17.3% since the beginning of the year, and the market saw several instances of daily and weekly losses at their highest level since the pandemic. 

Between recession fears, high inflation, and high interest rates making things harder for businesses and individuals alike, investors are reasonably concerned about how much worse it could get in the coming months.

There’s been a lot of volatility so we asked six experts what they thought about what may happen for the back half of 2022, and how to prepare for the worst.

Expert Stock Market Predictions for the Rest of 2022

‘We’re Going to See a Lot of Churning’

If the Fed’s aggressive rate hikes push the economy into a recession, companies’ earnings will be affected, which will in turn affect their stock prices. How big the effect could be will depend on the depth of the recession, says McMillan. 

“At this point, I think it’s going to be a shallow pullback, maybe another 10% from where we are right now,” says McMillan. “Once the economy adjusts to the higher [interest] rates, we’re going to be starting to move up again. I would say probably toward the start to middle of next year.”

For the rest of this year, though, “we’re going to see a lot of churning,” McMillan says. “We’re going to have a mixture of good news and bad news, [and stocks] will probably end the year about where we are right now.”

‘I Don’t Think We’ve Hit a Bottom’

Any time the market begins to decline, investors wonder how far down it’ll go — but that’s nearly impossible to predict. 

“When you see your stock portfolio go down 20%, and maybe more, investors are able to get an awakening,” says Thomas Muñoz, financial life advisor at Telemus, a financial advisory firm.  “I don’t think we’ve hit a bottom,” he adds. “From what we’ve seen in the first half of the year, the market has taken an extended downturn beyond 10%.” 

His advice? Keep investing on a regular basis. “Dollar-cost averaging works in environments like this.”  “Always tell yourself why you’re investing.” That’s something to keep in mind when things feel uncertain. 

‘The Market Hates Uncertainty’

The U.S. stock market looks forward and prices in breaking news in real-time. With so much up in the air, it’s hard for investors to make sense of what’s happening day-to-day. That translates to a volatile market situation that will last for a while with more Fed meetings scheduled this year. 

“The market hates uncertainty,” says Linda García, founder of In Luz We Trust. “The current economic situation is something we can’t compare to anything that’s happened, certainly not in our lifetimes,” García says. García suggests not to steer away from your investment plan and keep your eye on the horizon as investing is a long-term play.

‘We Could Be Down Another 20%’

With regard to finding the bottom, the next few months are about not creating even more losses in your portfolio as opposed to making your own predictions, says Lori Van Dusen, founder and CEO of LVW Advisors in Rochester, New York. “It’s about knowing what you own.” 

Van Dusen reminds that you only lock in a loss if you decide to sell your investments. History has shown time and time again that the market always bounces back eventually, and when that happens, you’ll be glad you didn’t panic and sell your portfolio. 

“We could be down another 20%. That could happen. No one knows the answer to that,” she continues.  But stay diversified and keep investing anyway. “That would be my best advice for the next six months.”

‘I Don’t Think the Worst Is Behind Us’

As volatile as this year has been so far, we should still stay prepared for even more shifting. Consumer spending is changing, and the overall set of factors are completely unique when compared to anything that’s come before. 

“Add the Fed in the mix, finally raising rates, and then the geopolitical issues with the war in Ukraine, which certainly doesn’t help inflationary pressure as far as oil, gas, and food supply. That’s all stuff that we haven’t totally felt yet. Some of that, we’re going to feel into 2023,” says Melissa Bouchillon, certified financial planner and managing partner at Sound View Wealth Advisors in Savannah, Georgia. 

“As we look to the second half of the year, I would expect more volatility. We could see a little run up like we did [before], but the trend and the trajectory is downward. I don’t think the worst is behind us.”

‘There Are Opportunities to Buy’

“When stocks go on sale, everybody wants to sell. It’s at their peak prices that people want to buy in,” says Alyson L. Nickse, partner and wealth manager at Crestwood Advisors in Boston. But if you’re able to keep investing, you’ll benefit from the additional risk you’re taking – both now and through the rest of the year. “The psychology of money can be emotional for investors,” says Nickse.

Investors have been in that mindset for the first half of 2022, even though companies have had attractive valuations. “There are opportunities to buy some really phenomenal companies” right now. If you can buy, “you’re going to be very happy if you continue to hold [your investments].”

How to Prepare for the Rest of 2022

Our experts agree that it’s likely to be a bumpy road ahead for the remainder of 2022. But, crash or no crash, recession or not, history tells us time and time again this is part of the journey. 

Volatility Is Normal, So Hang On for the Ride

It’s hard to really predict what’s to happen in the next six months, but for now, experts agree that volatility in the market is to be expected. Also, as the market changes and flows in the next few months, experts agree it’s best to hold onto your investments and ride the wave. You want to keep an eye on the long-term investment prize and not panic when things get bad.

“Whenever the market gets choppy, the important thing to remember is why you’re there in the first place,” advises McMillan. “Short-term effects don’t necessarily affect those long-term outcomes. Keep calm and carry on, it’s really as simple as that.”

Pro Tip

There’s likely to be more volatility in the stock market this year, but the key is to stay invested and keep investing regularly. Remember your “why” and stick to your plan. It’s part of the natural investment cycle.

Buy Stocks “On Sale” and Hold Onto Them

Our experts recommend staying the course and trying to keep emotions out of it. The worst thing to do now is to sell your investments at a loss and then get back into the market when stocks rise again. 

“Now is the time to buy stocks at more attractive valuations in comparison to where they were a year ago,” says Muñoz. 

If you can hold tight and stay invested, you’ll be that much further ahead when the market recovers. “You can’t afford to not be invested,” says Bouchillon. “Continue to invest. If you have a longer time horizon, you should be excited because you have opportunities to buy at lower valuations.”

Keep Your Portfolio Diversified

The best performing portfolios are the ones that are in the market for a long time, and are diversified. Diversification means having a well-rounded selection of stocks from companies in multiple industries and sectors. That way, if one company or industry dips, the others can pick up the slack. Experts recommend low-cost, broad-market index funds to invest in because they provide instant diversification to preserve your capital. 

Beat Inflation By Investing 

As everyday costs go up because of inflation, it’s important to invest your money. Traditionally, the stock market sees an average annual rate of return of 10% each year. Right now, inflation is over 8%, eating into consumers’ purchasing power and devaluing their cash. So by investing and keeping your portfolio diversified, you can hedge against inflation.

Understand Your Goals and Time Horizon

Market volatility shouldn’t worry young investors saving for retirement, says McMillan. Instead, they should be glad they’re able to buy stocks on sale, knowing that their time horizon is long enough that the market will eventually recover.

If you’re an older investor, though, now is the time to take a careful look at your stock portfolio and decide whether your current risk level is appropriate for your timeline and goals. 

“This is when you should be talking to your advisor and saying, ‘Do I understand the risks I’m taking? Am I comfortable with those risks?’” McMillan says. “Because ultimately, what’s going to make you succeed or fail is not your exact asset allocation, but can you stick with it through time.”

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