The Stock Market Outlook for 2023 According to the Major Banks

If predicting the stock market was easy, everyone would be doing it. In the real world, however, the best alternative is to look to industry leaders — with combined centuries of experience in reacting to and guiding market forces, big banks are a highly effective investment bellwether. Here's what they have to say about 2023's outlook.

Patience Will Be Key in 2023

According to Morgan Stanley, 2022's tumultuous markets bore a lesson: Many investors might be overplaying their hands. Smart asset holders should seek income and return potential outside U.S. equities, prioritize fixed income, and consider selectively owning stocks in new markets.

This isn't to say that equities are suddenly worthless. It just means that if you want to leverage their benefits — like inflation protection — you'll likely benefit from being quick on your feet, not to mention picking high-quality investments with strong margin resilience and plenty of free cash flow.

In other words, this is a year to stay patient. Demand a premium for taking on risk, and rebalance your portfolios as inflation normalizes.

The economic outlook reinforces the value of smart strategies. After a dire New Year's Day warning about a potential recession that would impact 33 percent of the world economy in 2023, markets saw investors get decidedly skittish. So what should we bear in mind from now on?

Broaden Diversification

Although broad diversification has long been a pillar of smart strategies, investors will really need to take the concept to heart this year: 2023 is forecast to be challenging thanks to inflation, bear markets, and layoffs alike, all weighing on stocks and bonds.

To combat the volatility, some are turning to alternative investments like commodities and managed futures, while others are taking advantage of high bond rates. With inflation in focus, hybrid robot advisors may offer the best of both worlds: low costs and expert advice. In short, the valuation imbalances, volatility, and other factors that made 2022 less than stellar could look more like opportunities in the year to come.

One of the biggest challenges for investors will involve growing their money in real terms, even though inflation will likely remain high. How to cope? Analysts advise diversifying your investments with bonds, sustainable infrastructure, and U.K. stocks offering attractive yields.

Gold and absolute return funds are also options for capital preservation. Review your goals and keep calm if your investment horizon is longer than five years — panic selling isn't in anyone's best interest unless you're buying!

The Recession Perspective

Forecasters have been predicting a recession since last year — but it never came. Investors shouldn't take this reprieve for granted, however: Experts like BlackRock say central banks' policy-tightening attempts to ease inflation are almost sure to cause one this year — and that, unsurprisingly, investors can't depend on the same regulators to provide a rescue.

Other groups like JP Morgan admit that even if the recession is too close to call in the short term, slower growth and lower inflation are highly probable. Again, the key may lie in looking to alternate opportunities: Instead of stubbornly sticking to longtime market stalwarts like the communication sector, which performed dismally in 2022, move into developing options like energy, healthcare, utilities, and information technology.

RBS and other banks also say there's nothing wrong with focusing on the positives — like investing in companies striving for Net Zero and exploring emerging markets.

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Alpesh Patel OBE