NASDAQ Composite Forecast 2023 – More Weakness Expected Until the Fed Pivots

The technology-weighted NASDAQ Composite finished sharply lower in 2022, dropping more that 33% in its worst year since 2008. Additionally, the risky index just posted its fourth consecutive negative quarter for the first time since 2001.

It was a painful year for high-flying NASDAQ investors with a volatile bear market, lingering inflation, and aggressive rate hikes from the Federal Reserve battering higher risk growth and technology stocks. These factors also weighed on investor sentiment.

As the new year begins, some bottom-picking investors will think the pain is over, but all indications are it is not. In 2023, we expect the bear market to persist until a recession hits or the Fed pivots from his aggressive rate hike stance.

There are a lot of questions was we head into 2023 with most investors just happy that 2022 is over. However, there may be some light at the end of the tunnel with some analysts saying the index will hit new lows during the first half of the year before rebounding in the second half of 2023.

Investors Bailout of Risky Investments

Technology shares had a miserable year. Inflation, massive rate hikes and a super-strong dollar encouraged investors to flee risky growth stocks that make up the NASDAQ Composite Index.

Meanwhile, Russia’s invasion of Ukraine, fouled up supply chains and lingering COVID worries turned the NASDAQ on its head in 2022. Inflation surged globally and central banks banded together to hike rates at a historic pace to keep price hikes from spiraling out of control.

Meanwhile, China, the world’s second-largest economy, periodically shut down entire cities to contain the pandemic. Energy supplies were cut off, recession fears sent demand tumbling in the second half of the year anyway. These factors were a few of the reasons why investors fled NASDAQ stocks.

Inflation Woes Weigh on NASDAQ Component Stocks

Inflation, which briefly pierced above 9% in the United States – a 40-year high – hurt economic growth and consequently demand for growth stocks, even as consumers continued to spend. But it mostly weighed on corporate profits.

The biggest stock market losers in 2022 were mostly found in the NASDAQ. They included Zoom Video communications, Zscaler and Atlassian. Popular tech stocks weren’t spared either with massive declines posted by Discovery, PayPal and Meta Platforms.

Additionally, electric car companies felt the brunt of the selling with huge losses posted by Tesla, Rivian Automotive and Lucid Group.

Elon Musk’s Tesla was down about 70% for the year, making the auto tech company the third-worst performer this year. Meta, Facebook’s parent company, also makes an appearance in the bottom 10 stocks – down 64% in 2022.

That was a major flip-flop from the end of 2021 when Tesla was the fifth-most valuable company in the S&P 500 and Meta was the sixth. Tesla is not the 11^th most-valuable firm in the index and Meta is in 19^th place.

And there were others, even tech favorites Amazon, Apple and Microsoft took major hits as investors adjusted to an environment in which rates were rising.

2023 Outlook – Recession and Fed Worries

2023 is expected to begin with the NASDAQ Composite under pressure especially since it was trading at its lowest level of the year on the last day of trading in 2022.

Growth stocks, or companies thinking about expanding their businesses quickly are expected to remain particularly bearish after getting hit hard in 2022.

Investors tend to buy growth stocks because of expectations of future profits. However, these stocks will not look too attractive in early 2023 if the Federal Reserve keeps raising interest rates.

And the Fed is expected to continue to do that. At its December meeting, the Fed dropped down to deliver a widely expected 50 basis point rate increase, but it also projected borrowing costs will rise by an additional 75 basis points by the end of 2023 – half a percentage point higher than officials forecast in September.

Such a move would take the Fed funds rate to around 5.1%, according to the median estimate in the Fed’s quarterly summary of economic projections – a level not seen since 2007. The Fed funds rates stood at 4.25%-4.50% at the end of the year.

Lower Until Fed Rate Hikes Stop

We believe the NASDAQ Composite will remain under pressure until the Fed either stops raising rates voluntarily or until they are forced to because of a recession.

However, there will be a lot of uncertainty over when the Fed will make the move, which is another reason why investors should keep the pressure on the index.

The most bullish situation for the NASDAQ Composite will be a drop in inflation and a slowdown in the Fed’s rate hike campaign. This is what Fed Chair Jerome Powell suggested in December. He said the Fed’s projections don’t necessarily mean the economy will fall into a recession. He also indicated the risk is worth it and that policymakers have no plans to cushion the blow by cutting rates.

In summary, look for the NASDAQ Composite to remain under pressure as long as the Fed is raising interest rates. A recession could give the NASDAQ a boost if it slows the Fed’s rate hiking campaign. But it is going to take a Fed pivot away from rate hikes to put in a real bottom and perhaps fuel a rally into the end of the year.