Investors of US stocks are looking forward to turning the page on this year, which has proven to be a rather brutal one, as the Federal Reserve continued to hike interest rates for tamping down inflation.
With just a couple of days left in this year, the S&P 500 has already dropped 20% in the year, making it the biggest decline in a calendar year since 2008.
The Nasdaq Composite has had to deal with severe carnage, as it has lost 34% this year.
The casualties
There have been some prominent casualties, which include Amazon which saw its shares drop 50%, while Tesla has lost 70% of its share price.
Likewise, Meta Platforms Inc. has also suffered losses of 65%. In contrast, energy stocks have posted eye-popping gains as they managed to buck the trend.
As 2023 gets underway, it is likely that a critical factor that will affect equity performance is inflation and the degree of aggressiveness with which the Fed tries to contain it.
However, investors will also be keeping an eye out on the impact of high-interest rates and how the economy reacts to a tighter monetary policy to assess if it can make other assets more competitive.
Recession or soft landing?
The biggest question that is likely to have an impact on stocks in the upcoming year is whether the economy is headed toward a recession or not.
If a recession hits in 2023, then there could be another slide in the stock market. Historic data shows that before the start of a recession, a bear market never hits bottom.
Stocks usually take a hard hit during a recession, as data shows that the S&P 500 dropped 29% in the recession after World War Two.
However, those declines usually bring strong rebounds once they come to an end.
The profits
Another worry that investors are facing is that a potential slowdown may not have been factored in when coming up with corporate earnings estimates, which would mean another fall for stocks.
Estimates indicate that there will be a 4.4% increase in S&P 500 earnings in 2023, yet recessions usually see earnings drop by 24% on average in a year.
Equities are also dealing with a lot of competition because of bond yields that have gone up due to the aggressive rate hikes by the Fed.
But, some investors have noted that stocks had done rather well in past periods even though yields had been even higher than they are now.
The last year saw value stocks perform much better than tech and others, which was a reversal of trends that have been in place for most of the past decade.
As growth and tech stocks are expected to be under pressure due to doubts about profit growth and higher yields, there is a chance that value stocks could outperform them yet again.
These stocks usually comprise defensive, energy, and financial stocks. Apart from that, the value of the US dollar would also have an impact on company profits.
