Stocks in 2023: Many strategists think prices will be higher but earnings lower

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I noted last week that there is an unusual divergence in thinking among Wall Street strategists for earnings and prices in 2023. Prices and earnings normally tend to move in the same direction. This is understandable, since anyone who watches stocks for any length of time can see that there is usually a relationship between earnings trends and stock prices. When earnings trends are rising, stocks tend to be rising as well, and vice-versa. Yet, in 2023, strategists do not seem to agree on this. A survey of 22 strategists indicated the average price target for the S & P 500 for year-end 2023 was 4,078. That would be about 7% higher than where the S & P is now. The same survey indicated the current estimate for S & P 500 earnings in 2023 was $210, a drop of 4.5% from the current $220 estimate for 2022. Prices up 7%, with earnings down about 5%? That is a bit unusual. Julian Emanuel at Evercore ISI is one of those strategists that has that same forecast. He has a price target of 4,150 for year-end 2023, an 8% increase, but is expecting S & P 500 earnings to decline by about 7%. In his first note to clients for the new year, Emanuel goes to some lengths to explain this oddity. Noting that 2022 was a year “when The Impossible became Commonplace,” he says 2023 “is likely to be a year when different ‘Impossibles’ occur — 4,150 SPX PT [Price Target] along with earnings/econ recession among them.” Acknowledging that prices up/earnings down seems incongruous, he notes “there is a long history of earnings down/stocks up years,” (noting that 1998, 2009, 2016, and 2020 fall into this category), “and also a tendency for strong stock/bond return years to follow historically forceful tightening cycles (1982, 1985) and years (1995) following weak 60/40 portfolio returns such as 2022’s declines.” True, but not very common. The core message: there will be a certain amount of “Suspension of Disbelief” necessary to (again) navigate through the new year. What does that mean for stocks? It means “patient accumulation” of what seems like odd choices, including China ADRs and what Emanuel calls “Misperceived Value” stocks. He is expecting consumer staples, energy and health care to continue to outperform, and specifically what he calls “Misperceived Value” stocks in those sectors, including Pepsi, Archer-Daniels Midland and Hershey in consumer staples, Exxon Mobil and Halliburton in energy, and McKesson and Vertex Pharmaceuticals in health care. “Value is likely to continue to outperform Growth into 2023 as the Fed is expected to maintain benchmark rates higher for longer, pressuring valuations,” Emanuel said.