12 Stock Market Predictions for 2023 | The Motley Fool (2024)

Unless you're a short-seller or were heavily invested in energy stocks, there's a good chance you, along with most of the investment community, took it on the chin in 2022. When the curtain closed, the iconic Dow Jones Industrial Average (^DJI -0.05%), broad-based S&P 500 (^GSPC 0.75%), and growth-focused Nasdaq Composite (^IXIC 0.19%), ended lower by 9%, 19%, and 33%, respectively. It was the worst performance for the three major U.S. stock indexes since 2008.

But a new year brings new hope, new opportunities, and of course, new prognostications. What follows are 12 stock market predictions for 2023 covering everything from the performance of specific high-profile stocks to expectations for the U.S. economy.

1. We'll still be in a bear market by year's end

Let's start with the most front-and-center question on investors' minds: What will the broader market do in 2023? Based on what history tells us, I'd opine that Wall Street will still be firmly in a bear market by the end of the year. Though it's possible the indexes could end marginally higher, a new bull market won't be declared.

Normally, the Federal Reserve lowers interest rates to help out an ailing economy and/or stock market. But with the nation's central bank tackling historically high inflation, rate cuts are still a long way off. It usually takes the S&P 500 in the neighborhood of a year to find a bottom once rate cuts begin.

2. The U.S. will fall into a recession in 2023

To somewhat build on the first prediction, it wouldn't be a surprise to see the U.S. economy dip into a recession this year. The telltale indicator that a recession is likely is the extended inversion of the Treasury bond yield curve. By "inversion," I mean long-term-maturing bonds having a lower yield than short-term-maturing bonds. Normally, the yield curve slopes up and to the right, with longer-dated bonds sporting higher yields.

Although not every yield curve inversion is followed by a recession, every recession since World War II has been preceded by a yield curve inversion. The magnitude of the inversion between the 2-year and 10-year Treasury bonds in 2022 was the largest in four decades.

10-2 Year Treasury Yield Spread data by YCharts.

3. The interest rate yield curve will reverse its inversion during the second-half of the year

On the other side of the aisle, I fully expect the yield curve inversion to correct itself before crossing the proverbial finish line into 2024. Wall Street and investors tend to be forward-looking, and there should be better clarity of the path forward for the U.S. economy and Federal Reserve monetary policy as we near the end of the year.

Arguably the biggest beneficiary of the yield curve reversing its inversion would be the mortgage real estate investment trust (REIT) industry. As short-term borrowing costs fall and/or long-term yields rise, mortgage REITs such as Annaly Capital Managementand AGNC Investmentshould benefit from beefier net interest margins.

4. The U.S. inflation rate ends the year far below expectations

If there is a bright spot to possible economic weakness in 2023, it's that the U.S. inflation rate can more quickly back off the 40-year high of 9.1% registered in June 2021.

In particular, recessions tend to hit energy commodities pretty hard. With crude oil and natural gas both soaring last year, a significant decline in one or both commodities could substantially reduce the inflation rate.

But don't get your hopes up -- a rapid reduction in the inflation rate is unlikely to alter Fed monetary policy. Fed Chair Jerome Powell has been clear that the central bank is willing to sit on higher rates for a longer period to ensure inflation is well under control.

5. Healthcare will be the top-performing sector in 2023

Last year, healthcare stocks were mixed, with COVID-19-driven companies struggling as the worst of the pandemic was put into the rearview mirror. In 2023, expect healthcare stocks to shine as their defensive nature and generally attractive valuations come into play.

For example, no matter how poorly the U.S. economy or stock market perform, we can't control when we get sick or what ailment(s) we develop. This creates steady demand for prescription drugs, medical devices, and a variety of healthcare services in any economic environment. In other words, healthcare stocks could be just what the doctor ordered during heightened volatility for equities.

6. Gold-mining stocks will be among the best-performing industries

In terms of industries, gold stocks can regain their luster in 2023 and vastly outpace the broader market.

There are a number of potential tailwinds for precious metals and mining stocks this year, including economic uncertainty, historically high inflation (at least during the early portion of the year), and multiple years of unabated money-printing by the U.S. Treasury, which make hard assets like gold appear all the more attractive.

Something else to consider is that gold stocks tend to perform their best during the very early stages of a bull market. While, in my view, a bull market is unlikely to materialize in 2023, investors may position themselves for a bull market in gold stocks well ahead of an official bull market in the Dow, S&P 500, and Nasdaq Composite.

7. Energy stocks will struggle following a strong year

On the flipside, energy stocks could have a challenging 2023. As I noted earlier, if a recession were to materialize in the U.S. or globally, demand for energy commodities would decline, which is bad news for crude oil and natural gas spot prices.

The other consideration is that oil and gas prices already pulled back in the second-half of 2022 without much of a dip in the share prices of oil and gas stocks. When investors wise up to the disassociation between energy commodity prices and oil and gas drillers over the past couple of months, the result could be ugly.

8. Apple will fall below $100

Last week, the largest publicly traded company by market cap in the U.S., Apple (AAPL -0.56%), fell below a $2 trillion valuation and touched its lowest share price ($124) since June 2021. In 2023, I'd look for Apple to return to double-digits and fall below $100.

Although Apple's services segment remains strong and the company accounts for a majority of U.S. smartphone market share, Apple's growth rate has slowed considerably. The iPhone 14 not offering a lot of differentiation from its predecessor, along with overseas supply chain challenges, could be playing a role in that slowdown.

Additionally, rapidly rising interest rates mean Apple has lost access to the cheap debt it would occasionally use to accelerate share buybacks. With just 3% sales growth expected in 2023 (per Wall Street), a price-to-earnings ratio of nearly 21 simply isn't that cheap.

9. Toyota will close out 2023 as the world's largest automaker by market cap

A little more than a year ago, electric-vehicle (EV) manufacturer Tesla (TSLA -0.77%) pushed north of a $1 trillion valuation, which was more than every publicly traded legacy automaker combined! As of the closing bell on Jan. 4, Tesla had retraced to a $409 billion market cap. By the end of 2023, I expect Tesla to have taken a back seat to Toyota Motorin market cap (currently $187 billion).

Investors are waking up the realization that Tesla isn't immune to the supply chain-, inflationary-, and demand-based headwinds impacting the auto industry. They're also coming to terms with Elon Musk being an undeniable liability for Tesla in a variety of ways.

10. China stocks will vastly outperform U.S. stocks

It's been quite some time since China stocks handily outperformed U.S. equities. My thinking is that changes in 2023.

Arguably the biggest issue for China for nearly three years has been its handling of the COVID-19 pandemic. The country's zero-COVID strategy crippled supply chains and sent provinces into seemingly unpredictable lockdowns. With that strategy being abandoned and China effectively pulling off the Band-Aid, short-term pain (i.e., widespread COVID-19 infection) can give way to serious economic growth and opportunity in the second-half of 2023.

It's a recipe for cheap Chinese growth stocks like Baiduand JD.comto thrive.

US Median Price for Existing Single Family Home data by YCharts.

11. U.S. home prices fall as much as 20%

The new year is unlikely to be kind to the housing industry. More than a decade of declining mortgage rates left homebuyers and refinancers effectively spoiled. But with the 30-year mortgage rate skyrocketing last year to a 16-year high of around 7%, the desire to buy homes and refinance slowed to a crawl. Housing is a supply and-demand-driven industry. If demand plummets, you can almost certainly expect prices to follow. I believe home prices could drop 20% over the next 12 months.

The silver lining here is if U.S home prices fall 20%, demand should begin to pick up -- at least from cash buyers. This'll keep the housing industry from suffering a crash similar to 2008.

12. A financial crisis will unfold (best guess: subprime auto loans)

Last but not least, I do expect some sort of financial crisis or contagion event to materialize in 2023. But given that crises and contagion events aren't all that uncommon, this isn't exactly a bold prediction.

What is a bold prediction is specifying where the crisis will originate. My best guess is among subprime borrowers in the auto loan space. As of October 2022, 5.13% of subprime borrowers were at least 61 days delinquent on their auto payments, which is up from 3.76% in October 2021. Higher inflation, the prospect of a higher unemployment rate in 2023, and the end of pandemic-related financial assistance programs, are all potential headwinds for folks with poor credit scores in the new year.

While a subprime auto loan credit crisis would pale in comparison to the financial crisis in 2008, it still would be very bad news for bank stocks and the auto industry.