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Bear market likely to end in 2023 with S&P 500 bottoming around 3000 levels

In an exclusive interview with Sunil Dhawan of financialexpress.com, Jose Torres, Senior Economist at Interactive Brokers talks about the indicators to track for early signs of market reversals.

Bear market likely to end in 2023 with S&P 500 bottoming around 3000 levels
Rate hikes work with a lag and it takes a few quarters for them to reflect in markets and in the economy.

Since the start of 2022, the S&P 500, a leading barometer of large-cap stocks, has been facing headwinds. As we enter the fag end of the calendar year, the S&P 500 index (Level around 3830) is lower by 16 % from the levels seen 12 months back while year-to-date (YTD), the index is lower by 19%. Most investors are searching for early indications of a market reversal as inflation is playing spoilsport and markets struggling to hold their ground.

In an exclusive interview with Sunil Dhawan of financialexpress.com, Jose Torres, Senior Economist at Interactive Brokers talks about the market bottom and the indicators that investors might be interested to keep an eye on for a reversal to happen. Torres, however, cautions something interesting about the market bottoms. Read on to know it.

Where do you see the bottom of the market? Is the bear market looking to end in 2022?

The bear market is likely to end in 2023 with a bottom of around 3,000. Earnings estimates still reflect growth in 2023 and that is far too optimistic. I’m expecting earnings to contract by about 12 percent in 2023 from 2022.

Rate hikes work with a lag and it takes a few quarters for them to reflect in markets and in the economy. Consumer balance sheets are weakening, and unemployment is likely to head higher in 2023, hampering revenue and earnings prospects for corporates.

In addition, when considering interest rates and the equity risk premium, the equity market is still expensive. We still have work to do on the valuation front and on the earnings front, with more downside to come with plenty of bear market rallies in the interim. Bottoming is a long and exhausting process, not a one-day event.

Which macro leading indicators should one watch to signal a reversal in the stock market?

The yield curve steepening, PMIs coming off a bottom, unemployment increasing, and Fed pivot are some of those indicators but we haven’t seen any of these signals yet.

Also Read: Fed Pivot and its importance for the stock market investors

Do you think the Fed will have to revise or re-consider targeting inflation at some point of time in the near future?

No, it’ll negatively affect the stability of decision-making regarding savings, borrowing, and investment. At 2 percent over the medium-long-term, market participants can behave consistently over time and this leads to sound decision-making.

Accepting higher rates of inflation means accepting inflation volatility which threatens inflation expectations, interest rates going all over the place, and hampers quality decision-making.

Also Read: Equities do well after U.S. Midterms but don’t expect the same this time due to recession: BlackRock

Chair Powell is as committed as ever to reaching the two percent target, admires the late Paul Volcker a lot for defeating inflation in the 1980s, and probably feels bad that policies under his watch contributed to today’s high inflation.

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First published on: 28-10-2022 at 05:43:00 am