3 reasons the stock market could keep surging in 2023

The stock market has made an explosive start to 2023. Our writer explores three factors that suggest a bullish outlook for equities this year.

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.

Young brown woman delighted with what she sees on her screen

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.

The stock market has shown considerable strength so far in 2023 after last year’s poor performance. In the UK and US, stocks continue to climb in defiance of some of the gloomier forecasts put forward by bearish analysts.

The FTSE 100 index is on the verge of reaching 8,000 points for the first time. Across the pond, the S&P 500 benchmark is on the cusp of a new bull market after rising 8% since the beginning of January.

Here are three reasons share prices could keep rising on both sides of the Atlantic this year.

1. Inflation is slowing

High inflation rates have been a major headwind for stocks. Rising prices bring uncertainty to the markets due to the corrosive effects on companies’ profitability and margins. This, in turn, knocks investor confidence.

However, there are signs that restrictive monetary policy is beginning to take effect. Both the Bank of England and the Federal Reserve have embarked on a series of interest rate hikes. The UK’s base rate is currently 4% and the federal funds rate is higher at 4.5-4.75%.

Inflation rates in both countries are cooling. In the UK, inflation’s down to a still-large 10.1%, but from the 41-year high of 11.1% posted last year. Stateside, it’s falling quicker. January’s CPI data revealed a 6.4% inflation rate, down from last year’s 9.1% high.

If inflation continues to fall, central banks have more leeway to relax monetary tightening. That’s traditionally viewed as bullish for the stock market.

2. Avoiding recessions

There’s an old adage often trotted out by investment analysts: “The stock market is not the economy.”

While this is true, there’s no denying the two are intrinsically linked. Anaemic economic growth, high unemployment and recessions can hurt equity valuations. In addition, catalysts for macroeconomic expansion such as innovation and technological breakthroughs are drivers of share price appreciation too.

Resilient jobs data in the US suggests the American economy may avert a recession this year. The IMF is more pessimistic on the outlook for the UK, but considering FTSE 100 shares derive around 82% of their revenues from overseas markets, the index is dependent on economic growth abroad more than it is at home.

Although there’s still a great deal of uncertainty, if recessions can be avoided, stocks could benefit.

3. China’s reopening

One final factor that might lift share prices this year is China’s economic reopening. The ‘zero Covid’ policies pursued by the Chinese government over the past couple of years have had a huge impact on supply chains and global growth.

As the world’s second-largest economy, China’s a critical player in determining how the stock market performs. Expected stimulus measures and a relaxation of strict public health measures could provide positive momentum for equities.

A note on risks

Although bullish factors could continue to drive stock market growth, caution is required. There are no guarantees with investing, and circumstances can change quickly.

Inflation rates could remain stubbornly high, economies may enter recession, and geopolitical tensions between the West and China could negate any positive effects from the Chinese reopening.

I’ll continue to invest in stocks this year, but I’m keeping enough spare cash on hand to remain nimble in the face of potential surprises.

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.

Charlie Carman 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

Closeup of "interest rates" text in a newspaper
Investing Articles

Here’s why 2025 could give investors a second chance at a once-in-a-decade passive income opportunity

Could inflation hold up interest rates in 2025 and give income investors a second opportunity to buy Unilever shares with…

Read more »

Investing Articles

As analysts cut price targets for Lloyds shares, should I be greedy when others are fearful?

As Citigroup and Goldman Sachs cut their price targets for Lloyds shares, Stephen Wright thinks the bank’s biggest long-term advantage…

Read more »

Investing Articles

Is passive income possible from just £5 a day? Here’s one way to try

We don't need to be rich to invest for passive income. Using the miracle of compounding, we can aim to…

Read more »

Middle-aged black male working at home desk
Investing Articles

If an investor put £20k into the FTSE All-Share a decade ago, here’s what they’d have today!

On average, the FTSE All-Share has delivered a mid-single-digit annual return since 2014. What does the future hold for this…

Read more »

Hand of person putting wood cube block with word VALUE on wooden table
Investing Articles

One FTSE 100 stock I plan to buy hand over fist in 2025

With strong buy ratings and impressive growth, this FTSE 100 could soar in 2025. Here’s why Mark Hartley plans to…

Read more »

Investing For Beginners

If a savvy investor puts £700 a month into an ISA, here’s what they could have by 2030

With regular ISA contributions and a sound investment strategy, one can potentially build up a lot of money over the…

Read more »

artificial intelligence investing algorithms
Investing Articles

2 top FTSE investment trusts to consider for the artificial intelligence (AI) revolution

Thinking about getting more portfolio exposure to AI in 2025? Here's a pair of high-quality FTSE investment trusts to consider.

Read more »

Young Asian woman with head in hands at her desk
Investing Articles

Do I need to know how Palantir’s tech works to consider buying the shares?

Warren Buffett doesn’t know how an iPhone works. So why should investors need to understand how the AI behind Palantir…

Read more »