The stock market in 2023 will have less pain but no gains as companies see anemic earnings growth, Goldman Sachs says

The stock market will go through less pain next year but will see no gains, as companies report anemic earnings growth through the course of the next five years, according to Goldman.

In a note on Tuesday, the bank said that the performance of US stocks in 2022 was all about a painful valuation de-rating but the equity story for 2023 will be about the lack of corporate earnings growth. Earnings per share in the S&P 500 would be $224 next year, and the index would decline to 3,900 over the next six months, according to analysts.

If the Federal Reserve can pull off a soft landing of the economy, that would be good. Analysts predicted that earnings per share would fall to $200 and the S&P 500 would fall to 3150 in a hard landing scenario.

The Fed raised its policy rate by over 400 basis-points this year in order to rein in inflation. The average cost of capital for US companies increased from its lowest level on record in 2021, to the highest in a decade this year, due to the increase in borrowing costs.

Analysts said that the cost of money is no longer zero. The price-to-earnings ratio of the S&P 500 fell from 21x to 15x this year, before recently recovering to 17x.

Analysts said that the increased cost of capital has translated into lower valuations.

Goldman predicts that the Fed will raise rates by another 125 basis points by the end of next year and reach a target of 5% in May of next year. By that time, central bankers will be able to see signs of inflation coming down, which will lead to a pause in rate hikes.

Raising interest rates could cause the US to go into a recession. Krugman said that rate hikes work with a lag in the economy and that some inflation indicators lag behind. He said that it could mean that inflation is already on the way down.