The outlook for 2023 is slightly better for stocks, but the first half could be downright ugly. Wall Street strategists reveal their predictions for the coming year. There is some consensus that the first half could be particularly rough, with the market possibly testing the October lows. Then there’s the expected recovery in the second half. Some experts expect the market not to be much higher than its current state by the end of 2023. “We’re all saying the same thing,” said Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets. “We’re going to retest the lows. Earnings are going to come down.” Calvasina expects the S&P 500 to end the year at 4,100. “My flat-year thesis is kind of consensus. I think the average strategist is about 4,000,” he said. “If there’s a risk, it’s not negative after the bad year we’ve had, it’s the other way around.” The S&P 500 is down nearly 15% in 2022. Strategists are also looking at a period when Federal Reserve tightening could push the economy into recession early next year. Views differ on how deep such a recession could be, with some expecting the central bank could yet ease into a soft landing. “Our outlook for risk markets in 2023 consists of two periods: market volatility and an economic downturn that will force interest rate cuts, followed by an economic and asset recovery,” JPMorgan’s Marko Kolanovic wrote in his outlook. The strategist expects a retest of the lows as there could be a significant reduction in earnings as interest rates rise. “We tend to think that could happen between now and the end of the first quarter,” he said. Michael Hartnett, chief investment strategist at Bank of America, sees a similar split for next year. “We remain in low-risk assets in the first half, poised to turn H2 bullish as inflation and rate ‘shocks’ of ’22 move to recession and credit ‘shocks’ in the first half of ’23,” he said. Jeff Kleintop, chief global investment strategist at Charles Schwab, expects a shallow recession may already be starting. He predicts the first half will be worse for stocks than the second half of the year, with a similar upheaval to the past six months. “Despite high volatility continuing over the next few months, we see positive returns for the year,” he said. “Next year you will pay the price for a better year.” A market scenario related to Calvasina said that clues for the coming year can be found in 2003 and how the market behaved at that time. “If you look at the playbook, this is when the stock market needs to take a breather,” he said. “The market pulled back in December and pulled back until March when it made the last bottom.” In 2003, the market was trading off the Y2K tech bubble. The market is now trading off post-pandemic stimulus. “They were both large-volume growth bubbles driven by spending,” he said. “There are many ways the market rhymes with that period.” Calvasina said investors can already expect first-half turbulence. “Whatever everyone is talking about for next year, you start reacting in December,” he said. Clarity on the economy should also come in the first quarter, and companies could help provide important information heading into earnings season. “We’ll have to see how confident companies really are. I think we’ll get more of a taste of that over the next few months. At that point, we’ll have some visibility into 2023,” he said. Calvasina said the degree of pessimism about the market is a positive bullish sign for stocks. “If companies calm down and don’t lay off a lot of people, I’m making a case for the mess,” he said. “I can see the seed of the good. I can also see the seed of the downside.” How to Play Kleintop said it has implemented a strict rule on which stocks to own in 2022, and that trend should continue next year. “If you look at it this year, it’s become a mantra,” he said. “It’s not about sectors or countries. It’s about quality. Companies that have a lot of cash flow relative to their valuations and pay high dividends. These strategies have worked all year.” Having quality names will help investors avoid worrying about where the market will fall or when to change their strategy, Kleintop said. “If you want to be in tech, just buy the highest dividend payers. They’ve done better,” he said. “The other common theme is the international theme. Finally, we’re starting to see international stocks outperform this year.” If the dollar begins to weaken, it will also be a tailwind for foreign stocks, he added. Calvasina expects small caps to be an area of superior performance, and he still sees value in terms of energy and finance. “If I could just make one trade and buy one thing right now, it would be small caps,” he said. Traditional technology such as semiconductors and software are also areas he is looking at, but not internet names. “Everything is in the 10-year trade [ Treasury]. If you get a drop in productivity, you should have some increase in your back pocket,” he said. “Don’t get the whole increase. Just be very selective. … I was selectively looking at tech names like rebound games.”