Investors have seen the best the stock market has to offer in 2023, according to Goldman Sachs.
"A soft landing — and in fact above-trend growth — is already priced in U.S. equities. Valuations are elevated vs. history and will be constrained by an eventual rise in interest rates. Even avoiding recession, earnings are unlikely to grow substantially in 2023," Goldman Sachs chief U.S. equity strategist David Kostin wrote in a new note on Monday.
Kostin lifted his year end S&P 500 price target to 4,000 from 3,600, but he added the debt-ceiling debate is likely to be a key risk. The S&P 500 currently resides at 4,111 after a solid 7% year-to-date rally.
The closely watched strategist said alternatives to U.S. stocks such as non-U.S. stocks, credit, and cash offer "superior" risk-adjusted return prospects.
To be sure, the rally across the major indices (the Dow Jones Industrial Average and Nasdaq Composite are up 14% and 3%, respectively) this year has taken many pros like Kostin by surprise.
For starters, the Federal Reserve is fresh off another interest rate hike as it continues to try and combat nagging inflation.
While the Fed is widely expected to pause its rate increases this year, the timing is wildly uncertain. That leaves investors staring down the barrel of potentially multiple more rate increases that could have the effect of slowing the economy and compressing stock valuation multiples.
Meanwhile, Corporate America is slogging through a disappointing earnings season that arguably doesn't justify the market's 2023 advance.
Big household name companies such as Apple (AAPL), Meta (META), and Starbucks (SBUX) have not only whiffed on fourth quarter earnings estimates but also offered cautious forward-looking commentary.
Earnings growth hasn't been there, either.
The blended earnings decline for the S&P 500 for the fourth quarter is tracking at 5.3%, according to FactSet. If that holds as the actual decline, it will mark the first year-on-year earnings decline reported by the index since the third quarter of 2020.
The combination of further rate increases and pressured corporate profit margins has others pros on the Street besides Kostin on watch for a pullback.
"If we look at market pricing so far this year, it's not even pricing in a soft landing. It's pricing in takeoff. It's pricing inflation to come down. It's pricing growth to avoid a recession altogether. It's also pricing in central banks cutting rates starting mid this year. So that is really markets are priced for perfection," BlackRock global chief investment strategist Wei Li said on Yahoo Finance Live on Friday (full video at the top of this story).
"And in the near term, beyond FOMO and chasing momentum, it's hard to see a fundamental reason for stocks to keep pushing higher," Li added.