We have made it to our final three predictions for 2023! And these could be the most important of our weeklong research process.

Each of these trends are impacted and formed by everything we’ve talked about in this series and represent, in my opinion, the largest impact to the market and investors.

If you missed any of our previous predictions, you can view the full details on part 1 here, on part 2 here, and on part 3 here.

For the final time in this series, let’s dive in…

Prediction #21: Major Indices Load Up on Energy Stocks

Given that energy stocks have had the best earnings growth for the past year, there is a massive shift happening on Wall Street this year: A renewed focus on energy.

The major indices have recently boosted their energy weights. As an example, the NASDAQ recently adjusted its holdings, adding six stocks. Two of the six stocks that were added were energy stocks—and no energy stocks were removed from the index. (I should add that several of the stocks that were removed, hailed from the tech sector.)

The NASDAQ isn’t the only index adding energy stocks. In the case of the S&P 500, energy stocks now account for about 6% of the index, up from barely 2% a year ago. I still anticipate energy stocks will account for 30% of the S&P 500, as institutional blowback against ESG continues to spread.

What this means is that institutional investors are now net buyers of energy stocks since they traditionally like to “track” indices. So, institutional buying pressure has increased substantially in energy stocks—and will continue to increase in 2023.

Prediction #22: S&P 500 Will Have Negative Earnings Growth in the Near-Term

While the fourth quarter should be the earnings trough for the S&P 500, the S&P 500 is still forecast to post negative earnings growth in the first two quarters of 2023. In fact, according to FactSet, the analyst community has continued lower earnings estimates over the past several months.

Back at the end of the second quarter of 2022, first-quarter 2023 earnings were forecast to grow an impressive 9.6%, and second-quarter 2023 earnings were expected to increase 10.3%.[1] However, these estimates have been lowered aggressively in the past six months. First-quarter earnings are now anticipated to decline 4.2% and second-quarter earnings are forecast to dip 2.9%.[2]

Breaking this down further, FactSet notes that 10 of the 11 S&P 500 sectors have experienced negative analyst revisions for the first two quarters of 2023. Only five sectors—energy, consumer discretionary, financials, industrials and real estate—are anticipated to have positive earnings growth in the first quarter.

What this means is that positive guidance is crucial, because as we’ll discuss in my final prediction for 2023, earnings momentum will be the key to success this year.

Prediction #23: Key to Success in 2023 Will Be Accelerating Earnings Momentum

We are essentially in a 15% market in 2023. What this means is that nearly all of the positive forecasted earnings and sales growth is only in 15% of all the stocks that I monitor. On the flip side, outside of the top 15% of stocks, there are lackluster earnings and sales.

As a result, the stock market will grow more narrow and more fundamentally focused in 2023, as institutional buying pressure chases fewer stocks than normal.

Earnings are simply the best catalyst for success in 2023. Time and time again, I’ve seen firsthand how earnings are a boon for stocks. The fact is earnings work 70% of the time. What I mean by this is that when a company announces better-than-expected earnings and sales results, investors celebrate and drive the stock higher.

Wave-after-wave of positive results simply dropkick and drive stocks higher. And when you consider that fewer and fewer companies will achieve positive earnings momentum in the first two quarters of 2023, it’s easy to conclude that fewer stocks will be rewarded and rally higher.

Bottom line: You need to remain laser-focused on companies with superior fundamentals in order to be successful in 2023.

Your Best Defense Is a Strong Offense

Here’s the great news for you: I’m obsessed with fundamentally superior stocks with strong sales and earnings growth, as well as positive analyst revisions. In other words, my main focus remains on the stocks with accelerating earnings momentum, as they should outperform in 2023.

My fascination with growth stocks started back in the late 1970s during my college years at Cal State Hayward. I wanted to uncover how to beat the market without taking on too much risk—and what I discovered was that a select group of stocks can consistently outperform the S&P 500: stocks with superior fundamentals.

Today, I’m a self-proclaimed “number guys” because the numbers do not lie—and right now, the numbers are telling me that fundamentally superior stocks—especially oil and natural gas, building materials, food staples, shipping and fertilizer stocks—should prosper in the New Year.

Our best defense is always a strong offense of fundamentally superior growth stocks.

Let me break it down for you…

Here at Navellier & Associates, we believe in the power of a well-balanced portfolio. It can literally neutralize the stock market’s uncertainty and take advantage of unique growth opportunities the market throws our way. That’s why we encourage our clients to take a diversified approach to managing their investments—one that can include growth, income, and capital preservation strategies.

Growth Portfolios

These portfolios feature companies that are committed to growing their sales and earnings. Our growth portfolios are segmented by market capitalization, are actively managed, and seek inefficiently priced growth stocks with opportunities for long-term price appreciation. We screen for small- and large-cap companies that are consistently growing sales and earnings. Our team actively manages this portfolio to find undervalued growth stocks.

Income Portfolios

These offerings provide dividend growth and income opportunities with capital appreciation. At Navellier, our dividend and income portfolios strive for portfolio growth through securities with capital appreciation, strong dividend growth, and income opportunities. We seek out companies that have a history of growing and paying dividends. Most importantly, these dividend-paying companies have free cash flow to cover each dividend payment. This can make it much easier to have reliable income in retirement.

Capital Preservation/Defensive Portfolios

These portfolios aim to outperform in up markets and limit losses in declining markets by moving to cash or bonds. This asset allocation plan allows investors to play defense in a declining market. Our capital preservation strategies can help you mitigate steep market losses with defensive ETFs and covered calls. Defensive ETFs can serve this need as they shift to cash or bonds when conditions permit.

When you add up everything we have discussed today, you can quickly see the importance of having a diversified approach to managing your investments—one that can include growth, income, and capital preservation strategies. The power of a well-balanced portfolio cannot be overstated.

When you dive deeper into the details of our exclusive portfolios and strategies, you will see that many of them cross boundaries and can be combined to form an overall portfolio strategy. That portfolio can then be customized to your personal financial goals and risk tolerance.

To build a personal portfolio that strives to deliver returns, it is important to think about things such as your retirement goals, how long you have to reach those goals, and what your risk tolerance is … just to name a few.

At Navellier & Associates, our team is here for you. We will work with you to answer these questions and discuss a customized solution tailored specifically towards you and your retirement goals.

Right now, we are optimistic that the stock market should rally in 2023, especially if the Federal Reserve “pauses” its key interest rate hikes. But not all stocks will participate in the melt up, as the market continues to narrow and grow more fundamentals focused. We can help you build a personal portfolio of fundamentally superior stocks that will prosper in 2023.

In fact, here’s a sneak peek at how we select stocks for each of our custom portfolio offerings…

Our Proprietary 3-Step Stock Selection Process

At Navellier & Associates, our system was built to find inefficiency in the market, uncover what we think are the market’s best growth stocks, and utilize a disciplined quantitative and fundamental analysis system to create a customized portfolio for individual investors.

Consider an example of the three-step proprietary stock-selection process that we utilize for most portfolios:

1. Quantitative Analysis: Using our proprietary screening process, we measure reward (alpha) and risk (standard deviation) indicators to the appropriate market capitalization range for each portfolio. We rank stocks based on the reward/risk measure and reduce the initial investment universe to a select bucket of stocks that fall into the upper percentiles of the reward/risk measure.
2. Fundamental Analysis: We then apply fundamental variable screens to the stocks with the highest reward/risk measures. This shines the spotlight on which companies have exceptional profit margins, excellent earnings growth (and positive earnings surprise potential!) and reasonable price/earnings ratios (based on expected future earnings).
3. Securities Optimization: We use a proprietary optimization model to maximize alpha, while minimizing portfolio standard deviation. This can efficiently allocate the stocks and create portfolios that are well diversified across sectors and industries.

Primarily, our goal with the three-step stock selection process is to develop portfolios that have a low correlation to their benchmarks, increasing diversification, decreasing risk, and maximizing profits for investors like you.

We’re in the early innings of 2023, yet we’ve already seen firsthand how the stock market is narrowing. Investors are growing more selective, and growth stocks with accelerating earnings momentum at a time when earnings growth is dipping will continue to attract the most institutional buying pressure. So, we believe that now could be a good time for you to have a custom investment strategy that focuses on your financial goals and risk tolerance, as well as diversification.

Navellier & Associates can help you build your own customized portfolio strategy. We rely on our extensive research, trend analysis, customized strategies, and historic market knowledge to manage our client-only portfolios and help our clients take advantage of opportunities that are presented by market corrections—short and long-term—as well as raging bull market situations.

Our proprietary models are built to work on U.S.-based portfolios with a minimum account value of $250,000. If your portfolio meets these criteria, please contact my Navellier & Associates team. They are standing by ready to discuss your personal portfolio and investment strategy to help you make the most of 2023.

Schedule Your Portfolio Review Today

Need some help determining if your portfolio is well-balanced? We can help!

The first step is contacting us to set up a no-obligation portfolio review. This is our opportunity to get to know you a bit more. And don’t worry, there is never a charge for this portfolio review. If you decide you would like Navellier & Associates to manage your portfolio—or one aspect of your portfolio—we will discuss any management fees for that service.

If you decide you’d like to continue to manage things yourself, we hope that we have given you some important information to consider during your portfolio review.

We are not here to simply preach to you, but rather share information that we have gained from our extensive market research and analysis. We also want to know about you so that we can make the right suggestions for your personal situation.

Click here now to schedule your no-obligation portfolio review.

I’m confident that Navellier & Associates can help guide you to build a portfolio to navigate the current environment and help you achieve your individual financial goals in 2023!

All the best to you and yours,

Louis Navellier
Chief Investment Officer
Navellier & Associates, Inc. │ Private Client Group

[1] https://insight.factset.com/sp-500-now-projected-to-report-year-over-year-earnings-declines-in-q1-2023-and-q2-2023
[2] https://advantage.factset.com/hubfs/Website/Resources%20Section/Research%20Desk/Earnings%20Insight/EarningsInsight_020323A.pdf

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2. Definition of Firm – Navellier & Associates, Inc. is a registered investment adviser established in 1987. Registration does not imply a certain level of skill or training. Navellier & Associates, Inc. manages a variety of equity assets for primarily U.S. and Canadian institutional and retail clients. The firm’s list of composite descriptions as well as information regarding the firm’s policies for valuing investments, calculating performance, and preparing GIPS reports are available upon request.

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