Wells Fargo Investment Institute released its 2023 outlook report, which outlines its expectations for a recession in the first half of 2023, recovery around mid-year and a rebound that gains strength into year-end.

The report looked closely at three key drivers: inflation, interest rates and corporate earnings. Wells Fargo Investment Institute believes that the decline of inflation will be a dominant theme in 2023, shaping the trajectory of economic growth and interest rates.

Outlook Highlights

• A recession and unwinding of inflationary shocks of the past 18 months could allow inflation to decline to under 3% on a year-over-year basis by year-end 2023.
• A moderate recession in the first half of 2023 may lead to a contraction for the year as a whole, marked by a 1.3% decrease in U.S. GDP (gross domestic product).
• Once investors begin to anticipate economic and earnings recovery, the S&P 500 Index is forecasted to gain into year-end. The S&P 500 Index target range is 4,300 to 4,500 for year-end 2023.
• The report provides a federal funds rate forecast of 3.5% to 3.75% and anticipates multiple policy interest-rate reductions after rates reach a peak above 4.5% early in 2023.

“The unfavorable risk-reward balance in both equities and fixed income jolted portfolio performance in 2022 and tilted our guidance more defensively for most of the year,” Darrell Cronk, chief investment officer for Wells Fargo Wealth & Investment Management, said. “And while we expect an economic recovery after midyear, we anticipate 2023 will be a volatile and challenging year for investors as we transition from a recession to a recovery; yet we believe that it may create strong opportunities to reposition for growth and back into a more pro-risk stance as the next economic recovery and bull market emerges.”