The biggest risk to stocks in 2023, according to Wall Street banks

Yahoo Finance Live anchors discuss big bank earnings and recession risks.

Video Transcript


BRAD SMITH: And also here, with just under three weeks until the start of a new year, there is no shortage of Wall Street commentary on what to expect in 2023. For their part, Morgan Stanley and Goldman Sachs are saying that earnings are the biggest risk for stocks here. And one of the particular highlights of the note here-- you had Morgan Stanley's Michael Wilson, and then additionally David Kostin of Goldman Sachs, both issuing some of their guidance going into 2023. But the final chapter to the bear market, they're saying, is all about the path of earnings estimates, which are far too high-- at least Wilson wrote in his note.

BRIAN SOZZI: Yeah. I think Evercore ISI-- Julian Emanuel noted that earnings can collapse next year about 15%. Really good note from him this morning. But I'm starting to think-- because of all this negativity on the street-- maybe stocks just go up 30% next year, guys! Everybody is thinking stocks will fall down next year because of the pressure on profits, you name it.

Deutsche Bank, to that point-- they came out with a survey of their own this morning-- surveyed or polled almost 1,000 professional investors. Their biggest risk to the outlook for stocks next year is recession risk. So that is something to keep in mind. Nothing new, per se, but to see it on a fancy chart really gets your attention.

JULIE HYMAN: Yeah. I don't even know if-- I'm turning my head sideways because that's how I'm reading your card on my screen.

BRIAN SOZZI: No, no, hold on. No, hold on a second. Hold on. Oh!

JULIE HYMAN: I don't even see earnings--

BRIAN SOZZI: There we go. Oh-hoh-hoh.

JULIE HYMAN: I don't even see earnings risk explicitly as one of the worries that are listed on there. I mean, all these other things that are listed feed through to earnings, right? But earnings itself aren't one of the risks there. But certainly that's something that a lot of strategists have been pounding the table on, that there is this risk that we're going to start to see earnings reset even more sharply than they have already.

BRIAN SOZZI: And then, just one more bleak note, because it's Monday, why not-- Bank of America is saying a recession is all but inevitable in the US-Euro area and the UK. So a bit of optimism from the folks at B of A.

JULIE HYMAN: Well, that's what's found in that Deutsche Bank survey, too, is that-- what's interesting is some of the survey respondents are pushing out their expectations of when a recession might begin in the second quarter versus the first quarter, for what it's worth.

BRAD SMITH: Right. And how severe of a recession would it actually be? And for consumers, even as we're thinking about the current period that we're in, and how some of that behavioral setup is actually taking place too, you already see that in how people are repositioning some of their shopping. You see that in where people are still incurring higher prices in some of the stickier areas where inflation is continuing to hit the household. But as it relates to the companies that are also going to see an impact, we've already seen the employment situation drastically shift.

We're not talking about how many jobs we're continuing to add. It's how many companies are freezing hiring, how many companies are cutting the amount of headcount that they do have. So that headcount reduction-- that's going to factor into what a recession looks like. You've got the spending-- that's going to factor into how deep or how mild a recession is, as we had heard from Jamie Dimon even last week. And so all of those things considered, I think early on as we go into the year, yeah, we've gotten the calls for earnings estimates to come down, but it's how long some of these companies will also have to endure that as well.

JULIE HYMAN: Yes, definitely. How long we all have to endure it, for that matter.