It's Darkest Before The Dawn

Weekly Briefs
02 Jan 2023
7 min read
It's Darkest Before The Dawn

Due to the Christmas holidays, last week was – as you can expect – a slow one on the news front. So in this week’s review, we’ve decided to look at what some market players are expecting for this year. The consensus view among both the sell- and buy-sides is that stocks are going to face fresh declines in the first half of the year before staging a recovery in the second half. That’s expected to leave equities only moderately higher compared to the end of 2022. When it comes to fixed income, the biggest investment firms are divided on the outlook for government bonds but seem to agree that risky corporate debt should be avoided. Last but not least, the International Energy Agency reckons oil prices could rally this year as sanctions finally squeeze Russian supplies and demand beats earlier expectations. Find out more in this week’s review.


Top strategists at Wall Street’s biggest investment banks expect US stocks to end 2023 moderately higher, but the recovery will be quite choppy. More specifically, they’re warning that US stocks face fresh declines in the first half of this year that could test 2022’s lows. That warning comes on the back of two main risks. First, weaker economic growth and stubbornly high inflation are expected to dent corporate earnings. Second, central banks will likely remain hawkish and continue to raise interest rates, weighing on stock valuations.

Wall Street strategists are warning that stocks still aren't pricing in earnings risk. Source: Bloomberg

The second half of the year will mark a recovery once the Fed stops hiking rates, according to the strategists. But they reckon that any rebound will likely be a mild one that’ll still leave stocks only moderately higher compared to the end of 2022. The average target of the 22 strategists surveyed by Bloomberg has the S&P 500 ending this year at 4,078 – about 7% higher than current levels. The most optimistic forecast is for a 24% increase, while the most bearish view sees it dropping by 11%. 

Strategists see more declines in the short term before a rebound in the second-half of 2023. Source: Bloomberg

That view of an 11% drop might be overly bearish considering that consecutive down years are rare for US stocks. That is, after last year’s fall, there’s only a low probability that they’ll post annual declines again in 2023. Since 1928, the S&P 500 has only fallen for two straight years on four occasions: The Great Depression, World War II, the 1970s oil crisis, and the bursting of the dot-com bubble at the start of this century. While negative returns for two consecutive years are clear outliers, it’s worth noting that when they have occurred, drops in the second year have always been deeper than in the first.

Negative returns for two consecutive years are rare but hefty. Source: Bloomberg

A separate Bloomberg survey of some of the world's biggest investment managers also showed predictions for a rocky start to 2023, with gains skewed to the second half. The survey of 134 fund managers, which incorporates the views of major investors including BlackRock and Goldman Sachs Asset Management, showed 71% of them expected stocks to rise, versus 19% forecasting declines. For those seeing gains, the average response was for a 10% return on the back of a resilient US economy, a slower pace of interest-rate hikes, and China’s reopening from strict Covid lockdowns. The top worries cited by those forecasting declines, meanwhile, were stubbornly high inflation and a deep economic recession.

Fund managers are predicting a better year for stocks than investment bank strategists. Source: Bloomberg

In Europe, meanwhile, a survey of 14 strategists projected average gains of about 5% for the Stoxx 600. That cautious prediction reflects all the challenges facing Europe, from an aggressive central bank to the war in Ukraine and the resulting energy crisis in the bloc.


The final chapters of 2022 brought a near end to the era of negative-yielding bonds. Yields rose throughout the year as central banks all over the world aggressively increased interest rates. Then the Bank of Japan stunned markets in December with an unexpected change to its yield curve control program. The move signaled that the world’s last ultra-dovish central bank is inching toward normalization and sent Japanese government bond yields surging. The country’s two-year government yield, for example, climbed into positive territory for the first time since 2015. That pushed the global stock of negative-yielding debt to below $700 billion – down from a peak of $18.4 trillion reached two years ago. That’s good news for bond investors, who can finally expect to earn some decent yields this year.

The amount of negative-yielding bonds globally shrank dramatically in 2022. Source: Bloomberg

But not everyone is enticed by the bond market right now – especially BlackRock, the world’s biggest investment manager. The firm’s highest-conviction bet is to avoid long-term government bonds as global debt levels rise, government borrowing climbs, and inflation remains elevated. Investors will increasingly demand higher yields to compensate for all these factors and interest rates may stay higher for longer than the market is expecting, according to BlackRock. To be sure, market players are quite divided on the outlook, with the likes of Fidelity International and Jupiter Asset Management piling into bonds to counter the risk of a recession. 

Time will tell if BlackRock’s call on government bonds proves to be correct. In the meantime, there’s arguably another corner of the bond market investors might want to avoid this year: US junk debt (or as its proponents like to call it, “high-yield” debt). That warning comes from Wall Street banks and rating agencies, who are expecting a surge of defaults over the next two years in the $1.4 trillion market for risky corporate debt. There are two reasons behind the pessimism. First, faltering economic growth is expected to dent corporate earnings. Second, the Fed’s most aggressive pace of interest rate hikes will pressure the junk-rated companies that swelled their debt piles with cheap money during the pandemic – especially those firms that issued floating-rate debt.

US leveraged loan issuance surged during 2021 as firms hit by the pandemic rushed to raised funds. Source: FT

Deutsche Bank, for example, expects the default rate on leveraged loans in the US to climb to 5.6% this year (up from 1.6%) before rising to 11.3% in 2024. That would leave defaults close to the all-time highs set in 2009. Strategists at UBS, meanwhile, forecast a default rate for junk loans of 9% in 2023 alone.


The International Energy Agency (IEA) reckons oil prices could rally this year as sanctions squeeze Russian supplies and demand beats earlier expectations. Russia’s output, which defied the agency’s previous predictions of collapse in 2022, is poised to plunge 14% by the end of the first quarter, according to the IEA. If that forecast holds true, it could reverse the recent trend of falling oil prices. What’s more, the IEA increased its 2023 forecast for global oil demand by 300,000 barrels a day amid strong growth in India and surprising resilience in China. In fact, Chinese demand could surprise on the upside as the world’s second-biggest economy relaxes its Covid restrictions. All in all, the IEA expects global oil consumption to grow by 1.7 million barrels a day this year to average 101.6 million a day.

After a strong run in the first of half of 2022, crude oil prices (WTI) gave up most of their gains in the second half. Source: Bloomberg

This week

Happy new year! And to kick off 2023, here’s an overview of some of the key market releases happening this week.

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The information and data published in this research were prepared by the market research department of Darqube Ltd. Publications and reports of our research department are provided for information purposes only. Market data and figures are indicative and Darqube Ltd does not trade any financial instrument or offer investment recommendations and decision of any type. The information and analysis contained in this report has been prepared from sources that our research department believes to be objective, transparent and robust.

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