3 stock market predictions for 2023 (2024)

Edward Sheldon has been thinking about what lies ahead for the stock market. Here’s what he thinks might happen in the next year.

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2022 hasn’t been a vintage year for the world’s stock markets. While the UK’s FTSE 100 index has held up pretty well (thanks to its energy sector exposure), it has been pretty ugly in the US, with both the S&P 500 and the Nasdaq indexes falling double digits.

Will 2023 be a better year for shares? I hope so. Realistically though, I have no idea whether it actually will be (and neither does anyone else) because the stock market is notoriously unpredictable.

Having said that, I do have a number of more general stock market predictions for 2023. Here’s a look at some of them, and the implications for my investment strategy.

Valuation will remain important

One of my predictions for 2022 was that there would be a strong focus on valuations. And this was bang on. This year, nearly every stock with an excessive valuation fell dramatically. Just look at Tesla, which had a very high price-to-earnings (P/E) ratio at the start of the year.

Looking ahead to 2023, I reckon valuations are going to remain a strong focus for investors. With interest rates now much higher than they were (and projected to keep rising in the short term), I think investors are going to be focusing heavily on metrics such as P/E ratios and free cash flow yields, in order to find stocks that offer value.

So I’m going to focus on companies that offer growth at a reasonable price (GARP) as I build my portfolio in 2023.

A solid year for healthcare stocks

My next prediction is that healthcare will be one of the best performing sectors in 2023. There are a couple of reasons I’m bullish on this particular sector.

One is that healthcare is quite a resilient industry. People don’t stop getting sick just because there’s a recession. I think this resilience will be important in 2023, as economic conditions could be weak.

Another reason is that a lot of healthcare stocks were impacted by Covid in 2022 and still have plenty of room to recover.

Two healthcare stocks I’ve bought for my own portfolio recently are Smith & Nephew and Edwards Lifesciences. The former specialises in joint replacements (where there’s a huge backlog for surgery) while the latter develops artificial heart valves.

A good market for stock pickers

My final prediction is that 2023 will favour stock pickers over index investors. I’m not expecting big gains from stock market indexes next year. To my mind, inflation, interest rates, and lower corporate earnings are likely to keep gains muted.

My view is in line with that of Goldman Sachs, which recently said it expects the market to be flat in 2023. “Put simply, zero earnings growth will drive zero appreciation in the stock market,” wrote David Kostin, Chief US Equity Strategist, in his 2023 outlook.

However, I think there will be many opportunities for those who pick individual stocks (like myself). For example, I reckon there will be plenty of under-the-radar small-cap shares that do well in 2023. I think it’s likely a lot of smaller companies will continue to grow at a fast pace even if economic conditions aren’t great.

Given this prediction, I’m going to be investing predominantly in individual stocks next year, instead of buying index trackers.