S&P 500 Forecast 2023 – All Eyes On The Fed

Key Insights

• The U.S. economy will likely fall into recession in 2023. 
• However, the stock market may still move higher if the Fed is not too hawkish. 
• S&P 500 needs to climb above the 4100 level to break out of the current downside channel. 

The Fed, Not The Economy, Will Be The Key Driver For S&P 500 In 2023

It’s been a tough year for the S&P 500, which has found itself under pressure in January and has been under pressure for the whole year. Bulls enjoyed three bear market rallies, but these rallies failed to change the general trend.

High valuations at the start of the year and hawkish Fed were the key drivers behind the move. The Fed remains hawkish and plans to push rates above the 5.00% level in 2023, but some observers doubt that this will be possible as the central bank will hurt the economy.

Recent economic data indicates that the housing market has already found itself under significant pressure due to high interest rates. Other segments are also expected to face material problems in the near term. According to the latest Bloomberg survey, the probability of the U.S. recession in 2023 increased from 65% in November to 70% in October.

It should be noted that a recession does not guarantee stock market weakness. Markets are always forward-looking, so some probability of the recession is already priced in by traders. However, if the recession is more severe than expected, stocks may gain strong downside momentum.

Fed’s policy will remain the key driver for the year 2023. If the Fed is too hawkish, stocks will have little chance to gain sustainable upside momentum. However, it will be hard for Fed to ignore economic data and financial market developments. I doubt that Fed will stay laser-focused on inflation if the pullback in markets turns into a real panic as the stability of financial markets is also very important for the economy.

S&P 500 Must Get Above 4100 To Develop Sustainable Upside Momentum

Taking a look at the weekly chart, S&P 500 remains in a downside channel. To have a chance to gain sustainable upside momentum, S&P 500 needs to settle above the recent highs near the 4100 level.

On the support side, the continuation of the current trend will push S&P 500 towards the low end of the current channel below the 3400 level. If the Fed is too hawkish, S&P 500 may get to these levels in the first half of 2023.

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