By Anne Kates Smith
From Kiplinger’s Personal Finance
Lori Calvasina, head of U.S. equity strategy for RBC Capital Markets, offers insight into the investing forecast.
Question: What’s your outlook for U.S. stocks?
Answer: Over the next couple of quarters, things will continue to be choppy. The markets are in the middle of a bottoming process, but I think the lows in prices may be in and 2023 will end up being a recovery year for stocks. We’ll get some additional volatility, but then the market could get back on track in the second half.
Question: Are U.S. companies in good shape?
Answer: In terms of earnings, analysts are a bit more optimistic than I am. The consensus expectation is for earnings per share of $234 for the S&P 500 in 2023. My number is $208, down from my forecast of $216 for 2022.
Question: What does that mean for stock prices?
Answer: A lot of the weakness we’ve seen in the market is anticipating weaker earnings in 2023. I don’t make recession calls for RBC, but my forecast for earnings assumes some hits to the economy in the fourth quarter of 2022 and the first quarter of 2023. If you think we’re going into a short, shallow recession that largely plays out over the next couple of quarters, there’s a good chance that’s baked into the market already. At the October lows, stocks were down 25 percent from their January peak. That’s already quite close to the median market drawdown linked to a recession, going back to the 1930s.
Question: Do you have a target for the S&P 500 for 2023?
Answer: It’s definitely a challenging time to put forecasts out there. We’re looking for the S&P 500 to end 2022 at 3800; 4100 is our target for 2023.
Question: With that scenario in mind, where should people be investing in the market now?
Answer: I used to cover small-cap stocks exclusively—stocks with market values from about $5 billion to $10 billion. It makes sense to add exposure to small caps now. They were very weak in 2021, when the rest of the market was very strong. Over the past few weeks, small caps have outperformed, and it looks like they’re ready to break out relative to large caps.
Question: Is it too late to play defense?
Answer: If you’re investing for the long term, I don’t think that’s where you want to add exposure right now. Defensive areas are about as overvalued as they tend to get relative to the broad market. Instead, you want to look at things like financials and energy—more of the economically cyclical, value-oriented parts of the market that still look undervalued. I’m not telling you to sell your defensive stocks today because things could chop around for a bit. But looking at some of these rebound plays makes sense to me.
(Anne Kates Smith is executive editor at Kiplinger’s Personal Finance magazine. For more on this and similar money topics, visit Kiplinger.com.)
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