With the brutal stock market action in 2022 and a looming recession, investors may be worried about further drawdowns. But precedent shows the market should end the year higher, with the likes of Tesla, Microsoft, Synopsys and Cisco Systems potential big winners.
This is according to CFRA Research Chief Investment Strategist Sam Stovall. With 2023 earnings estimates among Wall Street analysts continuing to shrink, it would be easy for investors to be downhearted. EPS growth projections for S&P 500 companies eased from 2.8% on Dec. 31 to 1.9% now.
Stovall found that after S&P 500 full-year sell-offs of 10% or more, calendar-year EPS growth slipped 75% of the time. But in these years where EPS growth estimates declined, the benchmark index actually rose in price 75% of the time since World War II.
"The correlation is not all that high between earnings in one year and price in one year as investors are anticipators. The old saying is that prices lead fundamentals," he told Investor's Business Daily. "It's natural to expect earnings to be lower in 2023 than 2022 because the market was off sharply in 2022."
Other Factors In Favor Of The Stock Market
He said there are several other factors in play that suggest the market should go higher by the end of the year.
"The third year of a president's term in office is traditionally the strongest, up an average of 16%," Stovall said. "The October to October time frame of a midterm election year through to the October of the third year has been up 100% of the time. That's a fact, not a forecast. It's not a guarantee, but it does imply from a cycle perspective the weakness usually occurs in the two quarters leading up to the final quarter of the midterm election year."
Stovall thinks investors should see this information as a reason to stay the course with their investments, especially as volatility could remain elevated until the stock market retests its Oct. 13 lows.
"Usually bull markets do not start without a successful retest of the prior low," he said. "Nerves might continue … but I think a year from now share prices will be higher."
Sector Rotation Could Pay Off In 2023
Stovall found that in post-decline years, the S&P 500 average gain was 14.1% vs. an 8.9% lift in all years. In addition, post-sell-off years were higher 81% of the time. Historically, 71% of years end with the S&P 500 higher. There have been 21 decline years since World War II, including those with drops of more than 10%.
"Again, it's not a guarantee, but you go with the probabilities. The probability is that 2023 could end up being a positive year as a result of prices leading fundamentals," he said.
According to Stovall, investors tend to rotate out of the sectors that held up best during declines, such as consumer staples, utilities and health care, into the sectors that were beaten up the most. In this case communication services, consumer discretionary, tech and real estate.
"History says by doing that, by going from first to worst, your frequency of advance equals that of the S&P 500. However the frequency of outperformance, you beat the market almost six out of every 10 times," he said. "It's a good track record, not necessarily a great track record, but still it indicates that the market tends to seek out opportunities and, following pretty sharp declines in the market, those groups that were beaten up the most tend to be the most attractive."
Tesla Stock Among Names That Could Flourish
Stovall screened these sectors for stocks which he thinks could have good years.
For the consumer discretionary sector he plumped for Tesla. The stock, which has surged on earnings, has just retaken its 50-day moving average with gusto. This would have been a very aggressive entry point for Tesla stock.
Investors could also consider using 199.02 as a potential entry point, though its 49% decline from high to low would make this an unusually deep base. TSLA has a perfect EPS Rating of 99.
Tapestry has formed an enormous cup base with a 47.15 buy point, MarketSmith analysis shows. The firm, formerly known as Coach, is among the top 6% of stocks in terms of price performance over the past 12 months.
One fly in the ointment is earnings. Tapestry holds a lackluster EPS Rating of 52 out of 99. Full-year earnings are seen climbing 5% in 2023 and 14% in 2024. The firm is getting set to post fiscal Q2 earnings on Feb. 9.
Aptiv is currently closing in on a cup base entry of 114.17. It broke a streak of earnings declines in the most recent quarter when EPS popped 161%. EPS is seen jumping 37% in 2023. The firm is a leading supplier of automotive components.
It is getting set to post earnings Thursday. An approach highlighted by Investor's Business Daily is to use options as a strategy to reduce risk around earnings. It's a way to capitalize on the upside potential of a stock's move around earnings, while reducing the downside risk.
In the communication services sector, T-Mobile U.S. has formed a flat base with an ideal entry point of 154.48. Earnings are a strength here, with the stock holding an EPS Rating of 95.
Why This May Be A Life-Changing Rally; 4 Stocks Near Buy Points
Microsoft Stock Among Stock Market Tech Picks
It is also among the top 16% of equities in terms of stock market performance over the last 12 months. Earnings are due late Feb. 1.
For technology, design automation play Synopsys is nearing a cup-with-handle entry of 364.09. All-around performance is strong here, netting it an IBD Composite Rating of 90.
Big Money has been snapping up the stock of late, which is reflected in its Accumulation/Distribution Rating of B-. Earnings are seen popping 15% in 2023 and 16% in 2024.
Long-Term Leader stock Microsoft is another pick. It is trading below its 200-day moving average, so it may be prudent to keep it on a watchlist in case a good entry emerges. Microsoft holds an EPS Rating of 85.
Cisco stock rounds out the technology picks. It has formed a new flat base with an entry at 50.81. The stock is now trading above the 50-day moving average and the 200-day line.
The firm is getting set to post earnings on Feb. 15. At the moment, performance for the computer networking stock is not ideal. It holds a Composite Rating of 63.
A pick in real estate is MAA. Earnings are strong for this REIT, with the stock holding an EPS Rating of 86. It also offers a dividend yield of 3.4%, which beats the S&P 500 average of 1.65%. There is no entry in sight at the moment, however, with the stock trading beneath its 200-day moving average.
Prologis is struggling all-around, with its Composite Rating sitting at 45. But it is back above its major moving averages, and the relative strength line is picking up steam.
It offers a 2.4% annualized yield but earnings are weaker than for MAA, with its EPS Rating coming in at 58.
Please follow Michael Larkin on Twitter at @IBD_MLarkin for more analysis of growth stocks.
