Wall Street’s top strategist says stocks are on a “volatile road” to nowhere in 2023

The highly-rated strategist sees a “volatile path” to reaching his base case target for the S&P 500’s 2023 year-end of 3,900 index points, about 2% below Friday’s close. He expects stocks to fall as earnings estimates fall before recovering in the second half of the year.

“The road forward is much more uncertain than it was a year ago and will likely bring multiple twists and turns and days/weeks of regret for investors who regret acting differently,” Wilson wrote in a note Monday. In the short term, he sees the stock market recovery triggered by last week’s good inflation data continuing for a few more weeks.

The portfolio strategist — who correctly predicted this year’s slump and ranked No. 1 in Institutional Investor’s most recent survey — said consensus earnings estimates for 2023 are still way too high. His baseline scenario sees US corporate earnings falling 11% in 2023 before a sharp rebound in 2024 as positive operating leverage emerges.

His comments are another warning for US companies as they wrap up their weakest earnings season since the first quarter of 2020, which was marked by the impact of high inflation, a stronger dollar and some dramatic profit warnings.

Wilson expects the S&P 500 to break between 3,000 and 3,300 index points in the first quarter — at least 17% below current levels. He recommends investors remain defensively positioned from a sector and style perspective “until estimates reflect bust.” Following the upgrade in staple foods, strategists are overweight in this sector, as well as in health care, utilities and defensive energy stocks.

Mislav Matejka, strategist at JPMorgan Chase & Co., is more positive. He sees continued support for stock markets from a peak in bond yields, a slowdown in inflation, light positioning and the likelihood of a smaller-than-usual earnings decline, according to a report Monday.