The 5 biggest threats to the stock market in 2023

What is 2023 looking like for the stock market?

A couple sits on a sofa, each clutching their heads in horror and disbelief, while looking at a laptop screen.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The S&P/ASX 200 Index (ASX: XJO) is having a solid finish to the year on Friday.

In morning trade, the benchmark index is up 0.65% to 7,064.8 points.

However, this won't be enough to take the index into positive territory for the year. As things stand, the ASX 200 index is poised to end the year with a 5% decline.

While I'm optimistic that 2023 will be a much better year for the stock market, it is worth noting that there are a number of risks that could have a big impact on its performance. Here are five big threats:

Inflation

Recent economic data both at home and abroad appears to indicate that inflation is now under control. However, there's always a chance that inflation could be more stubborn than expected and stick around for longer than forecast. This could weigh on company margins and support higher than expected interest rates.

Interest rates

If interest rates continue to rise and go beyond what the market is expecting, this could put pressure on stock market valuations. After all, if you could receive a 5% guaranteed return from a savings account or term deposit, investors are going to demand a greater risk/reward from the stock market. Unfortunately, this usually means lower earnings multiples, which invariably will mean lower share prices.

Cost of living

For many homeowners, the interest rate increases we have witnessed this year will have been a shock to the system. And with rates likely to continue rising in 2023, their mortgage repayments could put pressure on their budgets and ultimately their spending. Especially given the expectation that energy prices are going to rise strongly and the inflationary impacts on food prices.

Bad debts

If the cost of living crisis gets out of control, then it could lead to a spike in bad debts for lenders such as Commonwealth Bank of Australia (ASX: CBA) and Zip Co Ltd (ASX: ZIP). While the big banks are likely to have sufficient buffers, smaller lenders may not be quite as well-placed to cope. Given how much weighting the banks have on the ASX 200 index, if they underperform next year, they will be a major drag on the performance of the index.

Iron ore price

Another threat to the local stock market next year is the iron ore price. The ASX 200 index has got off lightly this year compared to some stock markets thanks to the performance of mining giants such as BHP Group Ltd (ASX: BHP) and Rio Tinto Ltd (ASX: RIO). For example, the S&P 500 index is down almost 20% this year on Wall Street. However, if demand for the base metal softens and supply increases, the iron ore price could reverse and put downward pressure on the miners and drag on the performance of the ASX 200 index.

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Zip Co. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on How to invest

A happy elderly man wearing a red cape smiles as he jumps up like a hero from a massage table.
How to invest

How to keep investing simple (and fun!) with this timeless strategy

There’s a smarter, simpler way to invest that’s caught the attention of beginners and pros alike.

Read more »

Man puts arm around woman and kisses her cheek outside their new home
How to invest

How to build a $100,000 ASX share portfolio from scratch

You may be surprised how quickly you could reach this goal.

Read more »

asx share price fall represented by investor with head in hands
How to invest

Should you sell you ASX shares if you think a stock market crash is coming?

Can we ever predict a market crash?

Read more »

A happy young couple lie on a wooden deck using a skateboard for a pillow.
How to invest

How to build wealth with ASX shares without taking big risks

Many investors believe they need to chase high-risk, speculative ASX shares to grow their wealth quickly. But in reality, most…

Read more »

Happy man holding Australian dollar notes, representing dividends.
How to invest

How $500 a month in ASX shares could become $1 million

It might not be as hard as you think to become a millionaire through the share market.

Read more »

Man pointing an upward line on a bar graph symbolising a rising share price.
How to invest

How to invest when the ASX hits a record high

Worried about buying at today's prices? Here's why you shouldn't be concerned.

Read more »

A man wearing glasses sits back in his desk chair with his hands behind his head staring smiling at his computer screens as the ASX share prices keep rising
How to invest

Lessons from a self-made ASX millionaire

Here's how he did it.

Read more »

A couple cheers as they sit on their lounge looking at their laptop and reading about the rising Redbubble share price
How to invest

$20,000 in savings? Here's how to target $1,000 of passive income each month

This could be the easiest way to build a meaningful passive income from the share market.

Read more »