In order to find the best stocks to buy in 2023, investors will need to be brave and patient in regard to timing, as well as agile as the stock market transitions from bear market to bull market. Go ahead and add resolute to the character traits you’ll need in 2023, because many market strategists say you can’t get from one market to the other without going through a recession first.
“Given the pace and intensity of Fed tightening, there’s a strong likelihood that the U.S. will enter a recession in 2023,” says Russ Koesterich, portfolio manager of the BlackRock Global Allocation Fund (opens in new tab). “That said, given strong household balance sheets and resilient consumption, our base case is that it will be a mild recession.”
Kiplinger’s current economic forecast calls for gross domestic product (GDP) growth to slow to 1.9% in 2022 and slow further to 0.5% in 2023 if there is a mild recession. If a recession can be avoided, then the economy in 2023 will likely expand at about a 1.1% rate. Look for inflation to fall to a 3.5% rate in 2023, down from an expected 7.7% at the end of 2022. By the time the Federal Reserve finally stops hiking interest rates, perhaps in the second quarter of 2023, the federal funds rate will likely be in the 5% range, up from 0.25% in March 2022.
For stocks, the turn from tighter monetary policy to easing will be a compelling all-clear signal – as will rock bottom valuations in prices. “History tells us that markets don’t find a bottom until investors can see Federal Reserve rate cuts or a trough in economic activity on the horizon, or when valuations are so low that they price in a bear-case scenario,” says Mark Haefele, chief investment officer at UBS Global Wealth Management (opens in new tab). “Today, none of those conditions are in place.” The most recent inflation news was encouraging. But stock investors have gotten their hopes up more than once that the Fed would signal a pause in hiking rates or, even better, telegraph cuts – only for rallies to fade when it becomes clear that the Fed remains hawkish.
Given the uncertain, sometimes roiling backdrop for stocks, where should investors look when seeking out the best stocks to buy for 2023? A popular piece of advice among Wall Street strategists now is to resist the bargain-basement appeal of the most beaten-up stocks and focus instead on high-quality shares. “Investors should avoid volatile names and be cautious on both deep-value and unprofitable growth companies,” says Koesterich. “Instead, emphasize quality with a focus on earnings consistency and good profitability.”
Generous and growing dividends are a hallmark of high quality and are likely to make up a much bigger portion of total returns than they have recently, says Caroline Randall, a portfolio manager at mutual fund company Capital Group (opens in new tab).
Move beyond the utilities and consumer staples stocks – these defensive plays are likely too expensive now. Healthcare is an exception, offering both growth and defensive characteristics. “It’s where our money is today – we’re always going to have money in healthcare,” says David Bailin, chief investment officer at Citi Global Wealth. The demographics of an aging population, and the innovation in pharmaceuticals and treatments that go along with increased longevity, are working in the sector’s favor, he says.
Now may be a good time to tilt toward value-oriented companies and small-cap stocks, both longtime underperformers that are showing signs of new life. Over the past five years, for example, the S&P 500 Value Index (opens in new tab) has returned 8.1% annualized, compared with 10.5% for the S&P 500 Growth Index (opens in new tab). Through early November of 2022, value outperformed growth big time, with a 7.6% loss compared with a 30.7% free fall. “We would stick with value. These cycles last a while,” says Ryan Detrick, chief market strategist at money management firm Carson Group (opens in new tab). Sectors typically grouped in the value style include energy, financials, industrials and materials.
So, with all of this in mind, here are 12 of the best stocks to buy in 2023. The names featured here vary by size and industry and are not meant to compose a diversified portfolio. But all, for one reason or another, are well positioned to benefit from a transition to a bull market from a bear market in 2023.
Data is as of Dec. 13. Dividend yields are calculated by annualizing the most recent payout and dividing by the share price.