Will US Equities Continue to Disappoint This Year?

As we enter 2023, many investors wonder whether US equities will escape another bear market and post a sustained recovery. The answer to this question is complex and multifaceted, but let’s examine the factors at play.

The State of US Equities in 2022

In 2022, US equities had a rough year, with the S&P 500 losing almost 20 percent over the 12 months. This was due to a combination of factors, including persistent inflation, sharply rising interest rates, a surging US dollar, and growing fears of a deep and prolonged recession. These factors all contributed to a broad equity market sell-off, the magnitude of which had not been seen since the 2008 Global Financial Crisis.

2023 Outlook

Despite the challenging economic landscape in 2022, 2023 seems to be starting positively. Following January’s performance, the S&P 500 posted respectable gains of around 7 percent. This is largely due to the Fed’s decision to slow its rate hikes in December and a successful 25-basis-points rise in February’s meeting.

Bullish investors may point to the slowing pace of rate hikes and the gradual easing of inflation as justification for believing 2023 will be a fruitful year for US equity markets. Plus, US stocks may even thrive this year if the Fed can successfully bring inflation to its 2-percent target while preventing the economy from tipping into a recession and corporate profits from significantly eroding.

Analysts also express moderate optimism over corporate earnings, particularly for the year’s final six months. Although the consensus of S&P analysts’ estimates in early February indicated a decline in corporate earnings of 4.2 percent and 2.9 percent during the first and second quarters of the year, respectively, the third and fourth quarters will experience earnings growth of 3.4 percent and 10.5 percent. The year will see earnings grow 3.0 percent to almost $230 per share.

Related Facts

• The US dollar, surging in 2022, has stabilized in early 2023, which will likely be good news for equity markets.
• The labor market continues to be healthy, with unemployment remaining low at 4.4 percent.

Key Takeaway

The outlook for US equities in 2023 is optimistic due to the Fed’s decision to slow rate hikes and the gradual easing of inflation. However, the economy still faces headwinds, and uncertainty remains. Therefore, it would be prudent for investors to keep a careful eye on corporate earnings and inflation rates to make informed investment decisions.

Conclusion

While US equities had a challenging year in 2022, early 2023 seems to offer a beacon of hope. By keeping a close watch on inflation rates, corporate earnings, and other economic indicators, investors can make informed decisions that may lead to profitable returns.