As economic growth slows, stocks are expected to drop soon.

• The world economy is predicted to grow slowly in 2023, at a rate of about 1.6%, as financial conditions tighten, China’s COVID policy is made worse by the winter, and Europe’s natural gas issues continue
• Although a U.S. recession is probably going to happen before the end of 2024, the global economy is not in immediate danger of entering one because the sharp decline in inflation helps foster growth.
• The S&P 500 is anticipated to retest its 2022 lows in the first half of 2023, but a Fed pivot could spark an asset recovery later in the year, pushing the index to 4,200 by year’s end.

For equity markets and more broadly risky asset classes in 2023, there are both good and bad news. The good news is that central banks will probably be compelled to change course and signal interest rate reductions sometime in 2019. This should lead to a sustained recovery of asset prices and subsequently the economy by the end of 2023. The bad news is that we will need to see a combination of more economic weakness, rising unemployment, market volatility, declining levels of risky assets, and falling inflation in order for that pivot to occur. In the near future, each of these is likely to contribute to or coincide with downside risk.

What is the Global Economic Growth Outlook?

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The year 2022 was shocking. The growth results for 2022 were much more stable than the historically volatile years of 2020 and 2021, which saw the deepest global recession on record followed by the strongest recovery. The global economy has been hit by numerous negative shocks this year, ranging from supply and demand issues affecting the labour market, a third major COVID-19 wave, to Russia’s invasion of Ukraine.

As 2023 approaches, the drag of tightening monetary policy is intensifying, but central banks continue to advance. 28 of the 31 nations J.P. Morgan Research monitors have increased their rates. There will probably be more.

According to its current projections, the Federal Reserve (Fed) will have raised rates by a total of nearly 500 basis points (bp) by the first quarter of 2023. The Fed is anticipated to pause rate hikes by the end of the first quarter of 2023, followed by other major central banks. This central bank activity is casting some doubt on the outlook for next year.

The sharp increase in borrowing costs has already had a negative impact on housing activity, and it is likely to have a negative impact on the profit margins of American corporations. Additionally, there are more and more indications that general credit conditions are tightening. The tremors coming from low-income commodity importers in emerging markets (EM), U.K. pension funds, and the U.S. crypto market are not unrelated; they indicate that rapidly tightening financial conditions are creating stress that may have negative spillover effects that could endanger macroeconomic stability.

“Despite the fact that the winter is expected to make China’s COVID issues and Europe’s natural gas crisis worse, we do not believe that the world economy will soon be in danger of entering a recession in the first quarter of 2023. 

A fading of supply chain and commodity price shocks is cushioning the financial conditions drag, according to Bruce Kasman, Head of Economic and Policy Research at J.P. Morgan.

After approaching 10% in the second half of 2022, global consumer price index (CPI) inflation is projected to slow to 3.5% in the early months of 2023.

“Context warrants taking into account a variety of possibilities. The most common occurrence in all of the presented scenarios is a U.S. recession before the year 2024. However, there are differences in the timing of this break, the direction of Fed policy, and the effects on the rest of the world, according to Kasman.

Stock market outlook

The S&P 500 price-to-earnings (P/E) ratio was derated by investors in response to a year of macroeconomic and geopolitical shocks by as much as seven times, while some speculative growth segments experienced a 70–80% drop from highs.

We anticipate that the S&P 500 will test the 2022 lows again in the first half of 2023 as the Fed overtightens into weaker fundamentals. The S&P 500 should reach 4,200 by the end of 2023 as a result of this sell-off, disinflation, rising unemployment, and deteriorating corporate sentiment, which should be sufficient for the Fed to start signaling a change of course.

Outlook for commodities

It was anticipated that the global oil market would remain competitive but stable in 2022, with Brent prices averaging $90 per barrel (bbl) during that time. J.P. Morgan Research decided to increase its average Brent price forecast for 2022 and 2023 as a result of the outbreak of the conflict in Ukraine. Prices peaked in the second quarter of 2022 at $114 per barrel.

“After eight months of maintaining our price outlook, we have decided to reduce our 2023 price projections by $8 in light of our expectation that Russian production will reach pre-war levels in the middle of the year. We find the underlying trends in the oil market to be supportive and anticipate that the global Brent benchmark price will average $90/bbl in 2023 and $98/bbl in 2024, despite more pessimistic expectations for balances over the coming few months.

The Rates and Currency outlook

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The Fed has been compelled to tighten aggressively over the past year, exceeding every tightening cycle over the previous three decades.It is not surprising that investors are still concerned about inflation and Fed rate policy for 2023; according to respondents in the J.P. Morgan Research 2023 Outlook Survey, these two factors will have the greatest impact on the U.S. fixed-income markets in 2023, followed by the risk of a U.S. recession. The Fed is anticipated to announce a 50 basis point increase in interest rates in December, and then to further slow the pace of tightening by announcing 25 basis point increases at its meetings in February and March. After that, rate increases are anticipated to stop.

Outlook for Emerging Markets

With a modest slowdown from 2022, EM growth looks to remain significantly below its pre-pandemic trend in 2023 at 2.9%. With significant regional differences, it is anticipated that EM outside of China will slow to a below-trend 1.8%. The economy of China is expected to grow by 4% year over year in 2023, with two-quarters of below-trend growth anticipated as COVID restrictions are loosened.

The main forces behind EM assets in 2023 will continue to be the international and American economic cycles. The worst movements for EM risky asset classes occur during U.S. recessions when credit spreads greatly widen and equity prices fall.