Here's exactly what needs to happen for the stock market to soar in 2023, according to Ned Davis Research

Trader at NYSE

A trader works at the New York Stock Exchange NYSE in New York, the United States, on March 9, 2022.Michael Nagle/Xinhua via Getty

  • The stock market sell-off in 2022 spilled over into the first trading day of 2023, giving little hope to investors that the decline is over.

  • But stocks could soar this year if the US economy manages to avoid a recession, according to Ned Davis Research.

  • “Fed stays on hold as it steers its magic carpet to a soft landing,” NDR said of the possibilities that could boost stock prices.

Investors have little hope that 2023 will be any different than 2022, which was a dismal year for stock market investors as the S&P 500 fell about 20% while the Nasdaq 100 dropped more than 30%.

The pain of 2022 spilled over into the first trading day of 2023 on Tuesday, with Apple falling 4% and Tesla plunging 12% as investors continue to move towards risk-off mode.

But according to a Tuesday note from Ned Davis Research, the stock market could indeed soar if a number of factors line up correctly.

The core tenet of what needs to happen for US stocks to print big gains in 2023 is the US economy avoiding a recession, according to the note.

And that could happen if spending on services remains strong enough that the labor market stays tight and job layoffs are scarce. Such a scenario would also help keep wage growth buoyant, NDR said.

There’s also an aspect of lower inflation helping the economy thanks to Social Security payments, which were adjusted higher last year to keep up with the cost of living. The combination of higher Social Security payments and lower inflation means “real consumption could surge,” NDR explained.

Another bullish factor that could send stocks higher this year is the impact of various federal spending bills that were passed last year, including the Inflation Reduction Act, the Build Back Better bill, and the CHIPS Act. Those three bills represent about $3 trillion in combined spending on different initiatives over the next decade, and the impact will start to be felt this year.

If these factors line up and the economy avoids a recession while inflation remains lower, it could lead to a Federal Reserve that “stays on hold as it steers its magic carpet to a soft landing,” NDR said. In that scenario, stocks could soar because earnings estimates would likely move higher.

“Bonds go nowhere. But earnings estimates get revised up instead of down, credit spreads contract, and stocks soar,” NDR concluded.

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