My 3 biggest stock market predictions for 2023

Roland Head gives his view on the outlook for the stock market in 2023 — including the next big sell-off and the outlook for dividend shares.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Athlete preparing to run on start line in a lane numbered '2023'

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

2022 was packed full of stock market surprises. I suspect 2023 will also deliver its share of unexpected news for investors.

Despite this, I think there are already some clear trends in play that could shape market performance this year.

For my first article of 2023, I’m going to attempt to predict three trends I think will have a big impact on my investment profits over the coming year.

1. The market hasn’t bottomed out yet

The UK market has staged an encouraging rally since mid-October. The FTSE 100 is has risen by nearly 10% over that period and is now trading broadly flat on a one-year view.

Even the hard-hit FTSE 250 has staged a partial recovery. At its low point on 12 October, the mid-cap index was down 30% year-to-date. As I write, that loss has reduced to a one-year fall of 20%.

However, I don’t think the market slump we saw last year is over yet.

In my view, the combination of rising interest rates and slowing economic growth will trigger a further sell-off at some point during the first half of the year. I don’t think it will be too severe, but it could provide some great buying opportunities.

I’m holding some cash in my portfolio, in the hope that I’ll be able to pick up some bargains in the new year.

2. Dividend shares will be big

UK savers can now get 3% interest on cash savings accounts. However, inflation is still over 10%, which could mean that prices keep rising.

This situation will be a new experience for many people. I think it will mean that investors start taking income-producing dividend stocks more seriously.

I feel companies with attractive dividend yields (say, 4%-6%) and stable growth rates could be in demand. Stocks such as these should have the potential to deliver a rising cash income and capital gains, providing protection against inflation.

To help me select shares, two numbers I look at are the dividend yield and the expected dividend growth rate for the year ahead.

If these two numbers add up to at least 7%, I think the valuation could be attractive. But I’ll always check that the forecast payout looks affordable when compared to profits, debt levels, and cash flow.

Right now, I’d avoid higher yielders with poor earnings cover and too much debt. A dividend cut could be in the pipeline.

3. The next ‘hot’ growth sector

Rising interest rates mean that the cost of funding for new businesses is going up. I expect that for speculative, loss-making companies will find it harder to raise funds in 2023 than in recent years.

I think this could be good news for Foolish investors. Companies that are small, profitable, and have good growth prospects may finally attract the attention they deserve.

On the other hand, companies that make a lot of noise but don’t produce much cash could see their share prices fall to more suitable valuations.

Many decent small-caps stocks suffered brutal sell offs in 2022. Although risks remain, I think there’s good value in today’s market for careful stockpickers.

Wishing you good luck in the markets in 2023!

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »