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Goldman Sachs sees ‘less pain but also no gain’ for stocks in 2023

Yahoo Finance's Alexandra Semenova breaks down Bank of America's and Goldman Sachs's outlooks for stocks next year.

Video transcript

BRIAN SOZZI: Bank of America and Goldman Sachs are both out with their equity outlooks and S&P 500 price targets. For the latest on those, let's bring in Yahoo Finance's Alexandra Semenova. Alexandra.

ALEXANDRA SEMENOVA: Well, guys, it's that time of year again, when Wall Street's big banks are looking at their magic eight balls to tell investors what they expect for the year ahead. And if you're an equity investor, there is not much to look forward to. The S&P 500 will trade just 1% higher than yesterday's close. That's according to the price target of strategists at both Bank of America and Goldman Sachs.

And the culprit for that is weak corporate earnings growth. That has been a theme for the new year on Wall Street. On Goldman's side, strategists led by David Kostin said that there will be less pain but not gain for US stocks. They estimate earnings per share on S&P 500 companies to be unchanged at roughly $224, attributing this lack of growth to sustained higher rates. And this is, of course, based on their base case scenario that the economy will not enter recession. If it does, that, of course, could be much worse.

And then on Bank of America's side, they see earnings per share falling 9% to $200. They attributed this to two things. The first is the erosion of margins across companies. Their near-term bearishness is based on wage growth outpacing the ability of companies to raise prices, which will really weigh on their earnings. According to their research, only half of the S&P 500 companies are posting real sales growth.

And the second is really quite interesting. They call this the wealth effect on steroids. So basically, the wealth effect is a behavioral economic phenomenon that suggests that consumers spend more as they see the value of their assets rise.

And in this case, they think because of the democratization of finance that we saw, because so many more people were making Robinhood accounts, participating in SPAC deals and other areas of the market, more people will be participating in the erosion of $22 trillion in wealth that we have seen last year. That is going to weigh on consumer spending power in the new year.

They are still bullish in the long-term. They see the S&P 500 returning 8% annually over the next 10 years. They put out a really interesting stat. They said if you own the S&P 500 Index for a day, the chances of making money are just more than a coin flip, about 54%. But if you own it for 10 years, there's a 94% chance of making money. So it pays off to be a long-term investor.

BRAD SMITH: Wow, all right, two-sided coin there-- well, at least in the near term. We'll see what the perspective is for the long-term. That's their outlook actually for stocks. So what about for the economic picture as well?

ALEXANDRA SEMENOVA: Yeah, so they see the economy, two very different pictures there. Bank of America sees the US heading into mild recession in the first half of the year. They see unemployment rising to 5.5%. Their target for the federal funds rate is 5% to 5.25%. But they did say that it could reach as high as 6% because of the continued momentum that we have seen in the economy and in the labor market. They don't see the Fed cutting rates until December.

And then Goldman Sachs sees the unemployment rate at 4.2%, just half a percentage point higher than it is right now. The federal funds rate also at 5% to 5.25%. And they don't expect a rate cut next year because they don't think that the US economy will head into a recession, and they don't think that a slowdown in inflation will be enough for the Fed to cut rates.

BRAD SMITH: Thanks for tracking this all. Alexandra Semenova, Yahoo Finance's own, breaking this down for us. Appreciate it.