In a year marked by unexpected twists, Wall Street’s predictions for 2023 proved to be wide of the mark across equities and bond desks. As 2022 came to a close, a prevailing sense of gloom swept through the financial industry, with many preparing for an imminent recession. However, the consensus on Wall Street, encompassing sell recommendations for US stocks, suggestions to buy Treasury bonds, and optimism for Chinese stocks, proved to be a major misjudgment.
Morgan Stanley’s bearish stock strategist, Mike Wilson, predicted a tumble in the S&P 500 Index, while Bank of America’s Meghan Swiber and team anticipated a decline in Treasury bond yields. Meanwhile, Goldman Sachs strategists, including Kamakshya Trivedi, were bullish on Chinese assets. This trifecta formed the dominant view on Wall Street, but reality played out quite differently.
Contrary to expectations, the S&P 500 surged over 20%, and the Nasdaq 100 recorded a staggering 50% annual gain—the highest since the dot-com boom. The global economic forces set in motion by the pandemic, particularly robust consumer demand driving growth and inflation, continued to confound even the most seasoned financial experts.
This miscalculation has left high-profile analysts, known as the sell side, in an uncomfortable position with investors worldwide who rely on their insights. Andrew Pease, Chief Investment Strategist at Russell Investments, expressed astonishment, stating, “I’ve never seen the consensus as wrong as it was in 2023. When I look at the sell side, everyone got burned.”
Despite money managers at firms like Russell generally outperforming benchmark indexes, their forecasts were not immune to the prevailing sense that the US and the world were headed for a recession. The Federal Reserve’s aggressive interest rate hikes and concerns about consumer and corporate spending painted a picture of economic contraction.
However, the year unfolded with accelerated growth and receding inflation, fueled in part by breakthroughs in artificial intelligence. This unexpected cocktail led to a bullish stock market, with a 6% jump in the S&P 500 in January alone and a mid-year increase of 16%.
Even as the year progressed, Wall Street analysts, including Wilson, remained steadfast in their bearish outlook. Wilson, previously hailed for predicting the 2022 stock-market rout, stuck to his pessimistic view, warning of a potential 2008-style crash in corporate earnings.
The bond market also witnessed its share of surprises. Bond yields, predicted to drop as the Fed reversed its near-zero interest rate policy, initially fell but later resumed an upward trajectory as the economy rebounded. Swiber acknowledged the humbling experience for forecasters, recognizing the difficulty in foreseeing the economic landscape accurately.
On the international front, predictions regarding Chinese stocks didn’t pan out as expected. Despite an initial rally in late 2022, China faced challenges, including a real estate crisis and deflation fears, leading to a downturn in its stock market.
As the year drew to a close, some on Wall Street’s sell side are reflecting on the lessons learned. Gennadiy Goldberg at TD Securities noted that the economy is more resilient to higher interest rates than initially thought. Despite acknowledging the strength, doubts persist, with Goldberg foreseeing a recession in 2024 and predicting a bond rally when it occurs.
In retrospect, 2023 serves as a reminder that even the best and brightest in finance can be confounded by the complex and dynamic nature of global economic forces.
