Wells Fargo Cuts 2023 Stock Forecast

What You Need to Know

As the economy weakens, stock prices could become more volatile, the firm says.
Markets need time to accept the unpleasant math of a weakening economy and higher interest rates.
Main economic weakness is likely postponed, keeping rates higher, Wells Fargo says.

Wells Fargo Investment Institute has lowered its U.S. equities year-end price targets to reflect its view that unexpectedly strong economic data will prompt the Federal Reserve to keep interest rates higher for longer and push a moderate and relatively brief recession to later in 2023.

Wells Fargo analysts now expect the S&P 500 to end the year somewhere in a range from 4,000 to 4,200, down from their previous 4,300 to 4,500 target.

They see the Russell Midcap Index ending the year at 2,700 to 2,900, compared with the previous 2,900 to 3,100 target range, and the Russell 2000 Index to close the year at 1,750 to 1,950, compared with the previous 1,800 to 2,000 target.

Wells Fargo also now expects the Fed’s benchmark interest rate at year end to reach the 5.25% to 5.5% range, well above the previous 3.5% to 3.75% forecast.

“The flourish of late-2022 consumer spending and job gains buoyed equity markets early in 2023, but the broader economy is trending slower. As the economy weakens, we expect Wall Street analysts to revise earnings lower, which suggests a more volatile year for equity prices, and one that could potentially allow investors to be more opportunistic,” the analysts said in a note Thursday.

“Federal Reserve policy adds potential disappointment that could cement a trading range for 2023. The fixed-income markets now have fully priced in the expectation for further Fed interest rate increases in March, May and June, but it’s not clear how quickly equity investors will acknowledge even-higher-for-longer interest rates,” they added.

“Financial markets appear to need more time to admit the unpleasant arithmetic of a weakening economy and higher interest rates. We believe the tug-of-war between denial and acceptance of these trends in markets is shaping this as a year that could potentially see a broad trading range — in other words, significant rallies and pullbacks but with no real direction.”

Wells Fargo lowered its 2023 year-end gross domestic product growth target to 1.1% from 1.3% and raised its estimate for the December 2023 Consumer Price Index inflation change from December 2022 to 2.9% from 2.2%.