The stock market in 2023 will have less pain but no gains as companies see anemic earnings growth, Goldman Sachs says

• Poor earnings growth will stretch into 2023, meaning investors should prepare for a year with no gains, Goldman Sachs said.
• That's because high interest rates will continue to weigh on corporate earnings well into next year.
• If the economy sees a soft landing, earnings will be flat and the S&P 500 will decline 2% in the next six months, Goldman said.

The stock market will go through less pain next year compared to 2022 but will see no gains, as companies report anemic earnings growth through the course of 2023, according to Goldman Sachs.

"The performance of US stocks in 2022 was all about a painful valuation de-rating but the equity story for 2023 will be about the lack of corporate earnings growth," the bank said in a note on Tuesday. Analysts estimated that earnings per share in the S&P 500 would remain flat at $224 next year, and the index would see a 2% decline to 3,900 over the next six months.

But that's assuming the Federal Reserve can pull off a soft landing of the economy and avoid a painful recession. A hard landing is still possible, analysts warned, predicting that earnings per share would fall 11% to $200 and the S&P 500 would plunge 21% to 3150 in that scenario.

The grim predictions have largely been spurred by the Fed's aggressive rate hikes this year, with the central bank raising its policy rate by nearly 400 basis-points to rein in inflation. That's raised the cost of borrowing significantly, bumping the average cost of capital for US companies from its lowest level on record in 2021, to the highest in a decade this year, at 6%.

"The cost of money is no longer next to nothing," analysts said. And that's weighed directly on stocks — the Goldman analysts point out that the price-to-earnings ratio of the S&P 500 sank from 21x to 15x this year, before recently rebounding to 17x.

"The increased cost of capital has translated into lower equity valuations," analysts later added.

Goldman estimates that the Fed will continue to hike rates by another 125-basis-points, eventually reaching a target of 5.0%-5.25% in May of next year. By then, central bankers will likely see clearer signs of inflation coming down, which will spur a pause in aggressive rate hikes.

Some experts have warned that raising interest rates that high risks overtightening the economy, sending the US into a recession. Wharton Professor Jeremy Siegel has noted that some inflation indicators lag behind official statistics by around 18 months, and Nobel laureate Paul Krugman added that rate hikes also work with a lag in the economy. That could mean inflation is already well on the way down, he said, and additional tightening could amount to overkill.