Recession risks, shrinking margins, and persistent inflation — some negative factors are keeping Goldman Sachs pessimistic about any chance of a substantial market rally in 2023. David Kostin, Goldman’s head of US equity strategy, said in a note. The Wall Street firm says its base case is that the S&P 500 will drop about 8% from here to 3,600 in the first half of 2023 before rising 11% to 4,000 by year-end. If the economy slips into a recession, Goldman says the S&P 500 will drop to 3,150. The stock market has been in turmoil this year as the Federal Reserve began aggressively raising interest rates and fighting inflation in March. The S&P 500 fell into a bear market and is now lower 17% over the same period last year. Many fear that those massive rate hikes could tip the economy into recession. Goldman said even without a recession, earnings could fall next year as profit margins are more compressed than previously expected. The company noted that S&P 500 companies’ third-quarter reports showed profit margins falling year-over-year for the first time since the pandemic. Meanwhile, there’s also the possibility that valuations could unexpectedly drop, Goldman said. “Stock valuations are likely to be lower than we expect if controlling inflation requires the Fed to raise rates more than expected,” Kostin said. The Fed raised short-term borrowing rates to a target range of 3.75%-4%, the highest level since January 2008. The central bank is widely expected to raise rates by 50 basis points during the week. this. “In terms of upside risk to our forecast, the stock would benefit if companies defend margins and boost earnings, but that seems unlikely unless the companies are able to defend their margins,” Kostin said. while inflation remains high. “A dovish Fed policy would represent a headwind to the P/E multiple but looks unlikely unless growth disappoints materially.” Others on Wall Street are also having a hard time staying optimistic next year. Wells Fargo said last week that this is likely to be a “very tough” market and that 2023 will not be a buy-and-hold year.