No one knows what 2023 holds for the stock market. Most economists expect a recession, and the Federal Reserve has forecast another 75 basis points of rate hikes next year, even as it sees inflation continuing to fall. A global recession could push stocks even lower, but next year it could also bring a recovery, as the stock market tends to rebound before the economy does.
Picking market-beaters is difficult in a volatile environment. Alphabet (GOOG -0.19%) (GOOGL -0.26%) and Walt Disney (DIS -0.25%) are two stocks that look poised to outperform based on their current valuations and prospects.
1. Alphabet: A tech monopoly at a bargain price
Alphabet's stock has fallen sharply this year, down 38%, as revenue growth has slowed and profits have fallen.
Like other big tech stocks, the Google parent has faced difficult comparisons with strong results in 2021, as well as declining demand in the ad market as businesses prepare for a recession by trimming marketing spending. Alphabet has also continued to hire aggressively, which has led to profits falling in the most recent quarter.
However, the stock's decline and those challenges set the company up well for a comeback next year. First, management has promised to curtail hiring in the fourth quarter and in 2023, which should help give profit margins a boost. On the earnings call, CFO Ruth Porat said that head count additions in the fourth quarter would be less than half of what they were in the third quarter.
That should give Alphabet's margins a boost on the bottom line, and the company could also get some help on the top line if the economic cycle begins to turn. Just as advertisers have cut spending ahead of a potential recession, they're likely to ramp it up quickly when they sense that the worst of the recession has passed and consumers are ready to spend again. Alphabet has twice before seen its ad demand slow sharply in economic crises, first in the 2008-09 financial crisis and later at the start of the pandemic, before quickly snapping back as the economic outlook improved.
Finally, Alphabet stock looks well priced at a price-to-earnings ratio of 17.7, making it cheaper than the S&P 500. If results improve next year, the stock should bounce back and beat the S&P 500.
2. Walt Disney: A turnaround in progress
Disney's stock has also had a dismal 2022, with shares down 45% year to date. In fact, the stock just touched a 52-week low after the Avatar sequel disappointed in its opening weekend, with $134 million in domestic box office receipts.
However, the company's performance should improve in 2023. First, the company already said that it expected its losses in its streaming segment to reach its nadir in the most recent quarter, and it forecast break-even results from streaming by 2024, eliminating the $4 billion loss it reported in the just-ended fiscal year.
Meanwhile, its theme park business continues to thrive and should benefit from the tailwind from the rebound in the travel sector and as Shanghai Disneyland recently reopened.
And Bob Iger has returned as CEO, to cheers from Disney executives and front-line staff. He's promising to reorganize the company to put the focus back on storytelling. He also said that he would prioritize profitability from streaming over adding new subscribers.
The transition to streaming has created a lot of noise in Disney's financial results, as its linear TV business is declining, and it needs profits from the streaming business to replace it. That strategy should eventually pay off, and it could happen sooner than investors think. Disney launched its ad tier for Disney+ this month and raised prices on its streaming services across the board, which should help improve margins.
Disney's flywheel model and its massive trove of intellectual property give it a competitive advantage, and the company should be able to get back to its pre-pandemic level of profits. If it can demonstrate an ability to get back there, when operating profits were double what they are now, the stock could have a long way to run.
