S&P 500: 2022 Review and 2023 Projections

by | Apr 5, 2023 | Research

The S&P 500 is one of the most widely watched stock indices in the world and it is often viewed as a gauge for the U.S. stock market as a whole. That’s because it tracks about 80% of the value of the overall stock market and it is weighted so that larger companies have a more significant impact on the movements of the index – like the overall market.

Many investors look to the S&P 500 to judge how their stock portfolio is performing relative to the overall market and make predictions about how their stocks could perform in the future. Last year, the S&P 500 had its worst year since 2008. Will this year be different?

The S&P 500 in 2022

Heading into 2022, the S&P 500 was in a unique position. Excluding the brief drop during the pandemic, the S&P 500 had experienced the longest bull market in history. The index reached a fresh all-time high of 4,796.56 on January 3, 2022. Then several factors were credited with bringing this extended period of growth to a close.

Russia’s Invasion of Ukraine

Following Russia’s invasion of Ukraine in early 2022, exports from both countries became difficult to source, which led to higher prices for those commodities. These higher prices raised costs for some businesses and their stock prices reflected the shift.

Investor uncertainty surrounding the Russia-Ukraine conflict also impacted the performance of the S&P 500 last year. Some investors attempted to profit from the geopolitical turmoil, while others flocked to the safety of government bonds.

Higher Costs and Interest Rates

The Producer Price Index and Consumer Price Index peaked at multi-decade highs in June 2022 at 11.3% and 9.1%, respectively. The Fed responded to high inflation by dramatically raising interest rates. Between March and December of 2022, the Fed funds rate rose from near zero to a target range of 4.25 – 4.5%.

Higher input and financing costs can raise expenses for some businesses which often result in lower profitability and, therefore, lower stock prices. Also, higher prices and interest rates for consumers can lead to slower sales for businesses, which can further erode profitability in some sectors. In addition, a risk-free rate – most often the 3-month Treasury yield – impacts many formulas used to value stocks. As Treasury yields rise, these stock valuations often tumble.

Stocks May Have Been Overvalued

The Shiller PE Ratio reached its highest level in more than 20 years during August 2021 and remained elevated into 2022. This ratio compares stock prices and company earnings over a 10-year period, adjusted for inflation. An elevated reading indicates that stocks are trading at a premium.

In data going back to 1872, the Shiller PE Ratio for the S&P 500 in 2021 was the second highest ever, surpassed only during the period surrounding the tech bubble in 2000. With stock prices historically high compared to earnings, many economists concluded that stocks were overvalued heading into 2022 and due for a natural correction.

S&P 500 Performance in 2022

The S&P 500 entered bear market territory in June 2022 and the index lost 18.1% for the year – its worst performance since 2008. Energy and Utilities were the only two of eleven sectors in the S&P 500 that reported yearly gains.

S&P 500 returns in 2022 by sector.

Data Source: S&P Global

The S&P 500 In 2023

Stocks started 2023 strong, with the S&P 500 recovering 6.2% in January. In February and early March, the index lost some ground, but recovered in late March. The S&P 500 ended the first quarter 7.03% higher which fueled some investors’ hope for a recovery after the dismal performance in 2022.

Historical Perspectives on the S&P 500 Following a Down Year

The S&P 500 has only had three periods of consecutive down years since 1928: The Tech Bubble Bear Market, The 1970s Recession, and the Great Depression. Despite some uncertainty in early 2023, economists and market strategists predict that the S&P 500 will follow the pattern of earlier market declines and recover some lost ground following a particularly bad year.

S&P 500 total return by year from 1992 through 2022.

Data Source: Yahoo Finance, Calculations by Motley Fool

Forecasts for the S&P 500 in 2023

Strategists polled by Reuters forecast annual growth of 9.4% for the S&P 500 in 2023. However, these strategists expect the index to decline in the first half of the year before advancing in the second half. Additionally, these estimates depend on moderating inflation and interest rates. If the Fed is unsuccessful in bringing down inflation, or rate hikes exceed current estimates, the S&P 500 could see slower growth.

J.P. Morgan echoed these sentiments, predicting a similar outcome for the S&P 500 in 2023. Dubravko Lakos-Bujas, Global Head of Equity Macro Research at J.P. Morgan, said, “In the first half of 2023, we expect the S&P 500 to re-test the lows of 2022 as the Fed overtightens into weaker fundamentals. This sell-off combined with disinflation, rising unemployment and declining corporate sentiment should be enough for the Fed to start signaling a pivot, pushing the S&P 500 to 4,200 by year-end 2023.”

Overall, forecasts for the S&P 500 in 2023 are cautiously optimistic. The Fed predicts that inflation will moderate and interest rate increases will stop by the end of the year. Additionally, many strategists conclude that higher commodities prices resulting from the Russia-Ukraine conflict are already reflected in stock prices. Finally, stock price-to-earnings ratios remain elevated but have retreated from their historic levels. Therefore, the factors that contributed to the poor performance of the S&P 500 in 2022 are expected to have less of an impact in 2023, allowing stocks to recover in the second half of the year.

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Article Topics: Stocks