Interview, Other
Piloting Through: Why Investors Should Stay the Course
- U.S. economic growth is projected to remain robust, operating in growth mode for over 80% of the time with a midpoint expectation of 3.7% for the coming year, while the global economy is forecast at 4.5%, both remaining above trend despite slowing from the previous year.
- S&P 500 earnings are expected to rise approximately 12%, following the historical average of 6% real earnings growth, with a base case total return forecast of 6% including dividends, a 65% probability scenario, and a 20% probability of 12% returns under a "good case" scenario.
- Market valuations are currently at the 10th decile level, carrying a roughly 80% probability of a 10% downdraft, with market multiples and valuations expected to contract slightly relative to end-2021 levels, though total returns over the subsequent decade could approach nearly 200% similar to the 1995-2000 trajectory.
- Inflation is anticipated to be high in the near term but moderate by mid-year for goods, while shelter and wages remain persistent, alongside a gradual decline in China's growth and zero-COVID supply chain constraints that may contribute to U.S. inflation.
- The Federal Reserve is expected to execute a slow tightening path of three to four rate hikes, potentially pushing the 10-year Treasury yield to 2%, with historical data indicating recessions typically begin 30 months after the first hike and equity peaks occur 24 months after, though six of 15 post-WWII tightening cycles did not trigger recessions.
- The unemployment rate is forecast to improve to 3.1%, labor force participation is expected to return to pre-COVID levels, and U.S. equities are positioned to better navigate risks like geopolitical shocks or new variants compared to non-U.S. markets.
- Strategic allocations favor U.S. equities due to expected outperformance over peers in emerging markets and the U.K., excluding energy, while allocations to non-U.S. developed and emerging markets, including China which is not viewed as offering significant opportunities, are expected to remain well below market-cap weighting.
- Investors are advised to lean into equities conservatively through option strategies, noting that equity returns are positive 88% of the time during economic expansions, and that the S&P 500 has historically gained an average of 36% from the first Fed hike to subsequent peaks.