Stock market investors, unless they have been betting on a decline in stock market indices, can count the three quarters of 2022 as exceptionally bleak for the moment. Since the beginning of this year, the Nasdaq 100 index has fallen by 30 percent, the S&P 500 and the German DAX have fallen by more than 22 percent, and the Euro Stoxx 50 by 21 percent. However, it seems that there is still no improvement on the horizon.
Equity markets may be squeezed by an increasingly bleak outlook for economic growth along with ever-higher interest rates. According to OECD forecasts released today, global economic growth could reach 3 percent in 2022, only to fall to 2.2 percent in 2023. Eurozone GDP could reach 3.1 percent in 2022, only to chafe at recession and record 0.3 percent growth in 2023. Germany's economy, on the other hand, is expected to experience a recession with a -0.7 percent drop in GDP next year. Meanwhile, in the United States, GDP is expected to grow by 1.5 percent this year, and 0.5 percent in 2023. These forecasts seem to show that the current year is not the worst one yet, and it is not until 2023 that a slowdown or recession might be felt.
Source: Conotoxia MT5, DE40, D1
Rising interest rates
Rising interest rates, along with a decelerating economy and little chance of spectacular financial results from listed companies, could push indexes downward. In the U.S., yields on 2-year bonds have already risen to 4.3 percent today, bringing them closer to the interest rate market's estimated target for the Fed rate at 4.5 - 4.75 percent. This could mean, in turn, that the U.S. dollar could soon be bearing interest in the region of 5 percent, based on the 3M LIBOR rate. Taking this into account, and the fact that the forward PE for the S&P500 is 16x, according to wsj.com data, someone could conclude that this valuation is still high relative to the USD interest rate. It seems that a drop in the multiplier toward 15x or lower could be more attractive to investors than its current value.
Source: Conotoxia MT5, US500, MN
Goldman Sachs forecasts for the S&P 500
The US bank presented two scenarios in its latest analysis. The first is a soft landing scenario. In it, the S&P500 is expected to be at 3,600 points by the end of 2022. In turn, the index of the 500 largest US companies would rise to 4,000 points next year. Meanwhile, in the second scenario, dubbed a hard landing, the S&P500 index would close the current year at 3400 points. In 2023, on the other hand, growth would reach the level of 3750 points.
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Daniel Kostecki, Director of the Polish branch of Conotoxia Ltd. (Conotoxia investment service)
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.