Not with a bang, but a whimper. Is this how the rally ends? The market’s surge in January has fizzled in recent days, amid renewed worries about inflation, rising rates, and a possible recession.

Wall Street’s mood was further soured this week by the release of minutes from the Federal Reserve’s most recent meeting, in which officials struck a hawkish tone. Perhaps a “soft landing” isn’t in the cards after all.

It’s too soon to say that we witnessed a bear market rally in January, but equities have lost momentum this month. Financial conditions have tightened considerably, leading to less liquidity in the markets. Should the bulls reassess their optimism for 2023?

To be sure, the main U.S. stock market indices closed sharply higher Thursday, suggesting that the bull case still deserves the benefit of a doubt. Notably, shares of semiconductor giant NVIDIA (NSDQ: NVDA) finished the session more than 14% higher in the wake of an earnings beat driven by soaring demand for artificial intelligence chips.

How will the bull/bear tug-of-war pan out? For answers I turned to one of the shrewdest analysts on our team: Robert Rapier, chief investment strategist of Utility Forecaster, Rapier’s Income Accelerator, and Income Forecaster.

Robert Rapier [pictured] is an expert in income investing, as well as the energy sector. My questions to Robert are in bold; the following are excerpts edited for the sake of concision and clarity.

What’s your rough projection as to how the S&P 500 index will perform in 2023?

The S&P 500 was down nearly 20% in 2022. I don’t think we will see a repeat of that. Historically, the S&P 500 rarely has back-to-back down years. We did see some strength in Q4 2022, and we are in positive territory so far in 2023. However, we still have economic headwinds to navigate.

There’s a good chance that we enter a recession this year. But the markets are forward-looking, and the performance in 2022 reflected the expectation of this recession.

I think we’ll see a double-digit gain in the S&P 500 this year, but it won’t be a huge gain. The market is reasonably priced now, but my outlook is for the S&P 500 to end the year with a gain of 10% to 20%.

Which sectors look the most promising to you right now?

I usually look at the sectors that underperformed in the previous year. Last year those sectors were the telecoms and technology, so I think they are due for a bounce. Real estate was another underperforming sector in 2022, and real estate investment trusts (REITs) generally perform well post-recession.

For growth investors in 2023, I would put more money in technology, and income investors should focus on REITs. Tech stocks have been oversold and innovative trends will accelerate this year that benefit the sector.

I think REITs will do okay in 2023, just because they underperformed by so much last year. The sector underperformed the S&P 500 by 6%, which is understandable given the interest rate situation. This will be very much like utilities, in my opinion. What would go a long way toward giving technology and REITs a boost would be a cooling of interest rate hikes.

Which sectors do you expect to underperform this year?

I predicted at the end of 2022 that energy would underperform, and the telecoms would outperform. So far that trend has held true. Energy stocks have soared in the past two years, but this is the year I expect them to take a breather.

I don’t think we’ll see significant underperformance from any other sector, although I should note that utilities and health care, both of which outperformed the S&P 500 in 2022, tend to underperform in the early business cycle (post-recession).

You’re our in-house utilities sector expert. How do you expect the sector to perform in 2023?

Last year utilities eked out a return of 1.4% against a nearly 20% loss in the S&P 500. So that was a win for the sector. But this higher interest rate environment hurts utilities.

Utilities could underperform this year, unless there are some indications that aggressive rate hikes are coming to an end.

Solar power assets underperformed in 2022. Do you expect the industry to gain traction this year, especially in the context of new legislative incentives?

The long-term fundamentals for the solar sector are sound. There is no question the solar sector will continue to experience huge growth rates, both in the U.S. and globally.

Thus, despite a setback in 2022, this is a strongly recommended sector for long-term investors. I believe we’ll see the solar sector close the year with at least a 20% return.

But make no mistake. We aren’t going to just need oil a decade from now. We’ll still be overwhelmingly dependent on oil a decade from now.

Governments should aggressively try to speed up the transition to “green” energy such as solar, but our leaders should also recognize that oil will remain our most important commodity in a decade; probably even two decades from now.

Energy was the top performing sector in 2022. Will energy match that performance in 2023?

It’s kind of funny to think about all of the prognosticators that wrote off the energy sector as dead just a few years ago. The past two years it has blown away every other sector in the S&P 500, returning 55% in 2021 and 66% in 2022.

For all of those organizations that divested your energy stocks, that was a costly decision. Barring a collapse in oil and gas prices, I think the energy sector will have a decent year. But I don’t think it can keep up with the pace of the past two years.

What are your expectations on U.S. monetary policy? Do you expect the Federal Reserve to ease its interest rate tightening cycle in the latter part of 2023?

There are mixed signals on the inflation front, but I believe inflation will slow down this year. That, in turn, should result in fewer of the aggressive rate hikes we saw during the past year.

The overall pace of inflation has been easing, which in turn takes pressure off the Fed. History shows that when the rate tightening cycle ends, stocks embark on an upward trajectory.

What are the worst risks facing investors this year?

Does the Fed slow down or halt rate hikes this year? That will play a huge impact on which way the market goes in 2023.

The market is fairly valued based on the latest cycle of earnings, but if we get a couple of sizeable interest rate hikes, we could see a full-fledged correction. I think we’ll see some economic results this year from the previous rate hikes, and that means the Fed will start to ease up.

Thanks for your time.

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John Persinos is the editorial director of Investing Daily.

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