Interview, Fireside Chat, Conference Presentation
Taking Stock: What’s Ahead for US Markets
- The Federal Reserve is projected to raise rates several times this year and into early 2023, with the Fed funds rate expected to reach 4.25%–4.5% by early next year and the core PCE inflation rate declining from 4.9% to approximately 2.7% by the end of 2023.
- Inflation trajectory is not expected to become clear until mid-2023, though rates are projected to decelerate from near 5% to roughly 3%, with equity volatility anticipated to decline only after this clarity emerges over the next six months.
- S&P 500 forecasts suggest a year-end close around 3,600, with a base scenario remaining subdued in early 2023 before a potential move higher by late 2023.
- Bear case scenarios involving aggressive rate hikes or recession could push year-end index levels between 3,400 and 3,600, with potential lows around 3,150.
- Short-term cash rates are projected to approach 4%, serving as a viable alternative to equities, while equity mutual fund cash levels have risen to approximately 2.5% of holdings.
- Market positioning indicates retail, institutional, and foreign investors are below average in equity exposure, while hedge fund net leverage is expected to remain near 65% after declining from 85% by 20 percentage points.
- Corporate earnings for Q3 are forecast to grow 4% year-over-year overall, but excluding the energy sector, market earnings are projected to decline by around 2%.
- Corporate margins are anticipated to compress due to a strong U.S. dollar and rising labor and materials costs, a trend diverging from current consensus expectations.
- Share buybacks, a primary source of demand, are expected to continue and potentially resume by mid-November following the earnings season blackout.
- The energy sector, representing 9%–10% of earnings but only 5% of capitalization, is expected to increase its market weighting if earnings targets are met.
- Investment preferences in Q4 are shifting toward quality attributes, favoring companies with strong balance sheets, higher ROE/ROIC, and stable growth.
- High-growth technology companies with long-duration characteristics face challenges from persistent rates, whereas tech firms with near-term cash flow visibility are expected to outperform.
- Major industrial and technology companies have already issued negative pre-announcements, signaling a more challenging environment for forecasts into 2023.