The stock market may retest this year's lows and returns will be nearly flat in 2023, Goldman Sachs chief equities strategist says

• Stocks may retest lows this year and returns will be near-flat in 2023, according to Goldman Sachs' chief equities strategist David Kostin.
• The S&P 500 may hit 3,600 in the near term, as companies have revise 2023 earnings forecasts lower, he warned.
• Next year, the S&P 500 could see nearly flat returns, Kostin added, estimating that it could end 2023 at 3,750 to 4,000.

The S&P 500 may retest lows earlier this year, and returns will be nearly flat in 2023 – even if the US steers clear of a recession, according to Goldman Sachs' chief equities strategist David Kostin.

In an interview with CNBC on Tuesday, Kostin warned investors that the S&P 500 could drop to 3,600 in the near term, as corporate earnings estimates for 2023 have already been revised down "pretty significantly" in recent months. That would retest a low seen earlier this year in June, when inflation clocked in at a 41-year-high of 9.1%. 

Next year, the S&P 500 could see nearly flat returns, even if the US skirts a recession, Kostin added, estimating that the benchmark stock index could end 2023 at 3,750 to 4,000. On Tuesday, the S&P 500 hovered around 3,930.

"Therefore, if valuations are roughly at these levels – that's an optimistic scenario in my opinion – and there's not much earnings growth, you basically have a flat market," Kostin warned. "On the other hand, if you have a recession – it's not the base case – if you have earnings drop in the order of 11% next year, that would suggest the market basically ends in a year's time at 3,750. So I think 4,000 to 3,750 is kind of the range you're likely to see. Near term, downside risk around 3,600."

If earnings suffer from lackluster growth, stock prices will largely be determined by valuations and interest rates, he said. And while the S&P 500 is down 17% from levels in January, the price-to-earnings ratio of the index is currently hovering around a multiple of 18. Historically, that ranks around the 80th percentile, meaning headwinds are likely next year.

Meanwhile, other Wall Street bankers have warned of an even-steeper 20% drop in the market as stocks battle rising interest rates, high inflation, and other headwinds on corporate earnings.

Morgan Stanley's top stock strategist Mike Wilson warned that earnings forecasts for 2023 were about 20% too high, meaning an earnings recession – and subsequent market bottom – could be in as soon as the first half of next year.

More bullish market commentators have disagreed, with former PIMCO chief economist Paul McCulley stating that stocks were now fairly valued after speculative areas of the market burst this year, such as in tech and growth stocks.

Fundstrat's Tom Lee, who has predicted a blistering stock rally in the last five weeks of the year, noted the S&P 500 has fallen 30% in real terms this year – a sign that financial conditions have already tightened, and a major bounceback could be in store.