The U.S. stock market may revisit its October bear market lows once or twice in 2023 if a significant corporate earnings contraction and recession develop, according to Jurrien Timmer, Fidelity Investments' global macro director.
Combining the Federal Reserve's signal that it will keep interest rates elevated for a while with the potential for a recession in the second half of the year, which would cause an earnings contraction, "It's not unreasonable to worry that there is another shoe that's going to drop," Timmer said on a Bloomberg "What Goes Up" podcast episode posted Friday.
"It is possible that the October lows were the lows and that if we get a mild recession or a mild earnings contraction or only an earnings contraction in real terms but not in nominal terms that we've seen the worst of it. But it is a risk that there is an earnings wave coming in let's say later 2023 and that we're not out of the woods yet," he said.
"So my very safe forecast is that 2023 is going to be kind of a choppy sideways market where we're going to revisit the lows maybe once or twice as the fear grows that there's an earnings wave coming, but at the same time there's going to be opportunities."
The big question for 2023 is whether the Fed will be able to raise interest rates just enough to tame inflation without prompting a severe recession and earnings contraction and another leg down for the stock market, Timmer said. The market's trajectory will be somewhat non-linear because stock prices tend to bottom before earnings, he explained.
