Goldman says it's 'difficult' to envision a scenario where market goes substantially higher in 2023

'It is difficult to outline a realistic scenario that drives the S&P 500 substantially higher next year,' said Goldman's David Kostin.

Recession risks, shrinking margins and stubborn inflation — a number of negative factors are making Goldman Sachs pessimistic about any chance of significant gains in the market in 2023. "It is difficult to outline a realistic scenario that drives the S & P 500 substantially higher next year," David Kostin, Goldman's head of U.S. equity strategy, said in a note.

The firm noted that S & P 500 companies' third-quarter reports showed margins contracted year over year for the first time since the pandemic. Meanwhile, there's also a chance that valuations could surprise to the downside, Goldman said. "Equity valuations would likely be lower than we expect if taming inflation requires the Fed to hike rates more than anticipated," Kostin said. The Fed has raised its short-term borrowing rate to a target range of 3.

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