Wharton professor Jeremy Siegel outlines the 3 big surprises that could shake up the stock market in 2023
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- Wharton professor Jeremy Siegel sees three big surprises shaking up the stock market in 2023.
- Siegel told CNBC that the fed funds rate could get cut in half by the end of this year and fall to 2%.
- "Instead of going to 5%, by the end of [2023]... I think we might see a 2% to 3% fed funds rate by the end of the year," Siegel said.
Wharton professor Jeremy Siegel expects a few big surprises in 2023 that will shake up the stock market and make it do the exact opposite of what most people expect.
In an interview with CNBC on Friday, Siegel outlined his bullish case for stocks, in which he sees a 15% jump happening in the first few months of the year.
"I've never seen so much bearishness. There's never been a time when 60% of economists forecast a recession. And when everyone's on one side, I get very wary. I think there might be some real surprises [in 2023]," Siegel said.
These are the three potential surprises investors should keep an eye on in 2023, according to Siegel.
1. Expect a spike in job losses, along with a spike in profits.
Many investors expect job losses to spike in 2023 as the economy finally slows down. And with it, profits should also fall. That's why most market strategists expect flat to negative earnings growth for the S&P 500 this year. But not Siegel.
"I think we might see the job market loosen up dramatically, even job losses, but that GDP grows much faster than most people think. We have a chance if the Fed pivots, to really avoid a recession and have a good year for profits. Because if productivity comes back, that puts downward pressure on prices, it puts upward pressure on margins," he explained.
"Everyone who says 'oh my goodness these 2023 [earnings] estimates are way too high' might be surprised that many of them might turn out to be what profits are going to be," Siegel said.
2. The Fed will cut interest rates dramatically.
The market currently expects the Federal Reserve to hike interest rates by at least 50 basis points in 2023, getting the fed funds rate closer to the Fed's terminal target of just over 5%. But Siegel thinks that's highly unlikely.
"Why should everyone believe the Fed when in fact the Fed has not done anything that they told us they were going to do over the last 18 months?" he asked, referencing the fact that at the end of 2021, the Fed forecasted no interest rate hikes in 2022. The Fed ultimately hiked rates by 425 basis points.
He added that the Fed has finally caught on that house prices are actually going down and will send inflation indicators lower.
"If you get a job loss, or a jump in the unemployment rate to 3.8% or 3.9%, you're going to get a different tone from the Fed... Instead of going to 5%, by the end of [2023]... I think we might see a 2% to 3% Fed funds rate by the end of the year," Siegel said.
3. The stock market will surge 15% in the first half of the year.
More than a handful of Wall Street strategists expect the stock market to continue its sell-off in the first half of 2023, finally finding its bottom as the broader economy enters a recession. From there, these same strategists expect a second-half rally as investors look to a future profit recovery.
Again, Siegel disagrees.
"My projection is a 15% increase, and believe it or not... I think the first half might be the increase that surprises people, because the market is very forward looking," he said.
"The market is forward looking. You can't wait until the sky is blue before you say 'oh yeah those profits are now going to be up I'll buy.' The prices are going to be up way before the profits respond to that recession. So even if you have a recession, I think it's discounted."