Stocks can rally 10% to 15% in 2023 as investors react more to the prospect of lower interest rates in the second half of 2023 than to a relatively small decline in corporate profits this year, Wharton School of Business professor emeritus Jeremy Siegel said Thursday on CNBC’s ” Squawk Box .” “As important as earnings are, and they’re very important, the discount rate is just as important if not more important,” Siegel said. “If you bring down that discount rate, the market will say that a mild recession or even a moderate recession for a year, I’ll take that. And that’s why I think the market still has a good chance of giving that 10% to 15% gain.” Siegel, perhaps best known as the author of “Stocks for the Long Run” in 1994, doesn’t think the Federal Reserve will stick to a high fed funds rate after pushing rates to their peak in the first half of 2023. “I don’t think rates are going to remain higher. I think they’re going to go down dramatically in the second half because of the weakening economy, the control over inflation,” he said. “You know, they don’t usually stay up when the Fed is in a hiking system for a year the way the dot plot said last December. I really think we’re going to have a big, large decrease in rates in the second half of the year because of the weakening economy and because of the dramatic slowing in inflation, and I think that’s what the market is looking forward to.” There’s also a chance that corporate profits don’t deteriorate as much as many investors fear in 2023, as companies move to slash costs and boost productivity, Siegel noted. “I don’t think [the labor market] is going to remain that firm,” he said. “I think we’re going to get a little bit of a reverse of what we had last year. Remember we added 4.5 million jobs and had almost no increase in GDP. That’s because of a collapse in productivity. If we get a rebound in productivity, we could have much weaker payroll numbers, GDP may not do as badly as people think, and firms may be able to cut excess individuals that they hoarded in the last two years, in order to control costs.” The result is that “earnings may not go down near as much as a lot of people fear, even though we would have a recessionary payroll type of data, which could induce the Fed to reduce their interest rates much more quickly.” More rate hikes are problematic Siegel said there’s no way to predict whether the Fed raises rates another two times in the first half, and that policymakers themselves probably only know a week or two before a Federal Open Market Committee meeting whether or not they’ll change rates. “Listen, all we need is one negative payroll month,” Siegel said. “I don’t think it’s going to be tomorrow. It could be tomorrow. Maybe it’s going to be the first week of March. I think that really changes the whole narrative,” Fed Chair Jerome Powell said Wednesday, noting that the labor market is the last piece of the economy “that drum tight.” If investors “see the labor market break, in some way or another, I don’t think any more increases are going to be on the table,” Siegel said. Siegel’s remarks come a day after the Fed hiked rates by 25 basis points, as was widely expected by investors. However, the central bank noted that it expects ” ongoing increases in the target range .”
