STOCKS WHAT GOES DOWN Cost pressures amid high inflation TENDS TO GO UP and still-snarled global supply chains fig. They say that what goes up must are the biggest factors, but slowing come down. For the stock market, it economic growth and the strong Potential slight also works the other way. Through U.S. dollar may make any earnings 2023 earnings gain many economic downturns, growth in 2023 difficult to achieve. would be welcomed recessions, and geopolitical crises Many companies over-earned during over many decades, the stock market the pandemic, so some reversion 7by markets has always recovered. Those patient back to normal still needs to occur. and courageous investors who were Inventories also need to be brought CONSENSUS S&P 500 EPS 2022 able to take advantage of those down. Even though some of these CONSENSUS S&P 500 EPS 2023 declines have usually been rewarded pressures have started to ease, lower LPL RESEARCH 2023 FORECAST nicely. Following down years, the S&P commodity prices and slightly looser $260 500 has risen an average of 15% with labor markets have, thus far, had positive returns in 15 out of 18 years limited impact on inflation overall. $250 [Fig. 6]. Since 1950, a down year was Our base case for S&P 500 earnings $240 only followed by another down year per share in 2023 is $220, similar to three times: in 1973, 2000, and 2001. where 2022 is tracking and about $230 Looking at this another way, after $12, or 5%, below the consensus losing 20% or more at any point in estimate as of November 15, 2022 $220 time, the S&P 500 Index has gained an [Fig. 7]. Revenue will continue to get average of 17.6% over the subsequent a boost from inflation, as many blue $210 01/22 03/22 05/22 07/22 09/22 11/22 12 months (monthly data). The positive chip companies during third quarter Source: LPL Research, FactSet 11/15/22 Earnings per share expressed as $ of EPS post-midterm election year pattern, earnings season have demonstrated an Forecasts set forth may not develop as predicted and are subject to change. discussed later in this publication, ability to pass along higher prices due provides another historical analog that to their pricing power. But margins will should be supportive of higher stock likely compress further over the next prices in 2023. several quarters before support from lower costs potentially arrives. WIDE RANGE OF POSSIBLE An upside scenario could EARNINGS OUTCOMES materialize if inflation falls faster than Corporate America faces significant we anticipate, propping up margins headwinds as 2023 gets underway. and potentially putting S&P 500 Stocks have historically bounced back after down years CALENDAR YEAR S&P 500 RETURN S&P 500 RETURN THE FOLLOWING CALENDAR YEAR 50% fig. 25% 60% -25% -50% 1953 1957 1960 1962 1966 1969 1973 1974 1977 1981 1990 1994 2000 2001 2002 2008 2011 2015 2018AVERAGE Source: LPL Research, FactSet 11/15/22 Indexes are unmanaged and cannot be invested in directly. Past performance is no guarantee of future results. Returns displayed are price returns, excluding dividends. LPL RESEARCH