Bob Pisani
CNBCDecember 14, 2022

Bulls are hopeful that the market has fully priced in the “higher for longer” scenario. They note that inflation is falling in most metrics, bond yields are down and the dollar is at 6-month lows. Bulls and bears agree on one thing: the problem for stocks is not inflation. That is a 2022 story.

The problem for stocks in 2023 is the extent of a recession, and the extent of the earnings decline.

Gloomy on 2023 earnings prospects

Analysts — who cover individual stocks and sectors — have been reducing 2023 earnings estimates at a fairly rapid pace. At the beginning of October, next year’s earnings were expected to rise by 7.8%. Today, they are at 4.8%.

Strategists, on the other hand, who look at the stock market from a top-down, “macro” perspective (they estimate prices based on economic data, not company reports), have a much dimmer perspective.

At the start of December, the average 2023 estimate for S&P 500 earnings from 19 top Wall Street strategists called for them to decline by an average of 6.5%. That’s a spread of more than 11 percentage points between the strategists and analysts. Even assuming that analysts are historically an optimistic lot (they are), that is a wide spread.

It’s no better for price estimates. The 2023 year-end S&P 500 price estimate is all over the map. At the start of this month, it ranged from a low of 3,650 at Societe Generale to a high of 4,500 at Deutsche Bank.  The average of 17 macro strategists surveyed by Bloomberg at the start of the month was a little over 4,000.

Here’s the problem:  that’s where we are now. The S&P is at 4,000, so on aggregate Wall Street strategists are expecting no price gains in 2023, along with lower earnings. So the outlook for stocks in 2023 essentially boils down to this: is inflation dropping fast enough to stave off a serious recession that would result in a dramatically negative year for earnings growth?

For the moment, strategists in aggregate are choosing the “mild earnings recession” and about a 6% earnings decline. That is not a soft landing, but it’s not a hard landing either. Hard landings would see earnings decline 20% or more.