The S&P 500 has dropped more than 19% this year, and many growth stocks have suffered even more severe declines along the way. Inflation and concerns about the economy have led investors to dump investments, even quality ones, out of fear that things will get worse.
But as bad as things are and with inflation still a problem, there is a possibility that the bear market could come to an end next year, and a bull run could begin. Here's a look at why that might happen and the types of stocks you should consider investing in right now.
Inflation is slowing down
According to the latest data, November's inflation rate was 7.1%. For multiple months, the inflation rate has been declining, and although it's still high compared to a few years ago, it's a positive sign that the government's attempts to slow it down through interest rate increases may be working.
US Inflation Rate data by YCharts
There's still a long way to go to get back down to around 2%, but the good news is that at the very least, things don't appear to be getting worse. And a slowing inflation rate isn't the only reason to be optimistic about next year.
If there's a recession, it could be a mild one
By and large, analysts are expecting a recession next year as supply chain issues and inflation could make a slowdown in the economy inevitable. And while that may sound concerning, that doesn't mean it will be a prolonged one. Analysts from JPMorgan Chase are projecting a "mild" recession next year, suggesting that it may not persist for several quarters. And if that's the case, it's possible that before the end of the year, a downturn could be over, and at the very least, there should be some growing optimism that things are improving.
And as investors know, it's guidance and expectations that often drive share prices. A more promising outlook for the economy before the end of the year would suggest that a recovery should be well underway in the stock market, and that's why a bull market could be in its early stages by then.
Now could be a prime time to buy stocks
Many stocks have incurred significant declines this year and may be poised for strong rallies once optimism returns to the markets. Shares of tech titan Alphabet (GOOG -1.65%), for instance, have crashed 37% since the start of the year because companies have been cutting back on advertising in anticipation of a likely recession. But as those fears subside, Alphabet, owner of Google and YouTube, which depend on advertising revenue for much of their growth, should benefit from more bullishness. That's why it could be a stock that has lots of potential upside next year.
But investors don't need to just look at stocks that are down big this year; there are also quality healthcare stocks to buy, including AbbVie (ABBV -0.85%) and Vertex Pharmaceuticals (VRTX 0.73%), that are trading at earnings multiples of 21 and 24, respectively. The industry average is 22 and both stocks could warrant higher premiums given their potential to generate stronger earnings in the future.
In AbbVie's case, the drugmaker and Botox owner still has more upside given its diverse operations and that the healthcare industry is still in the process of returning to normal. Vertex, meanwhile, is a dominant force in treating cystic fibrosis. It also has a gene-editing treatment, exa-cel, that if regulators approve next year, could lead to incredible returns in the future.
Even if you're concerned about the state of the stock market, now may be an optimal time to invest because there may be a more bullish outlook on the economy in 2023 that leads to a stronger performance by many growth stocks. Buying stocks before that happens could result in some excellent gains for investors.
