Equity investors hoping for a better year in 2023 will be disappointed, according to Goldman Sachs Group strategists, who said the bear market phase is not over yet.

“The conditions that are typically consistent with an equity trough have not yet been reached,” strategists including Peter Oppenheimer and Sharon Bell wrote in a note on Monday. They said that a peak in interest rates and lower valuations reflecting recession are necessary before any sustained stock-market recovery can happen. 

The strategists estimate the S&P 500 will end 2023 at 4 000 index points — just 0.9% higher than Friday’s close — while Europe’s benchmark Stoxx Europe 600 will finish next year about 4% higher at 450 index points. 

The comments come after a recent rally — driven by softer US inflation data and news of easing Covid restrictions in China — that saw several global indexes enter technical bull market levels. The sharp rebound since mid-October followed a tumultuous year for global markets as central banks embarked on aggressive rate hikes to tame soaring inflation, stoking concerns of recession.

Goldman’s strategists said the gains aren’t sustainable, because stocks don’t typically recover from troughs until the rate of deterioration in economic and earnings growth slows down. “The near-term path for equity markets is likely to be volatile and down,” they said.

The view echoes that of Morgan Stanley’s Michael Wilson, who reiterated today that US stocks will end 2023 almost unchanged from their current level, and will have a bumpy ride to get there, including a big decline in the first quarter next year. 

Goldman’s strategists expect Asian stocks to outperform next year, with the MSCI Asia-Pacific ex-Japan ending the year 11% higher at 550 points. Their peers at Citigroup Inc. turned more bullish on Chinese stocks today, saying Beijing’s pivots on Covid Zero and property should lift earnings.

With the bear market still in full swing for now, Oppenheimer and his team recommended focusing on quality companies with strong balance sheets and stable margins, as well as those with deep value and energy and resources stocks, where valuation risks are limited.