Signals to watch for in 2023
Whilst there are a mix of signals from competing asset classes, we are looking onto 2023 for clues to become more positive.
A key indicator will be a trough in economic momentum in the US. With interest rates rising so quickly in the past year, the housing market has felt the effect and is already slowing. If this troughs in 2023, for us that will be a key indicator for a more positive economic climate.
Likewise, when we look at earnings a trough in earnings momentum would be a key indicator. Currently, analysts are cutting estimates of corporate profitability, as demonstrated by the Global Earnings revision ratio in the chart below. In periods of economic weakness, estimates continue to drift lower. Markets can rally if the pace of downgrades ease, but for the time being, estimates are getting worse more quickly.
Markets tend to rally after the trough of earnings estimates
Source: Bloomberg, Artorius
Equity markets appear tied to the path of US interest rates. Will the Federal Reserve continue to raise rates even as inflation appears to be peaking and the economy slows?
Different asset classes appear to be discounting different economic outcomes for 2023. The equity market appears to be pricing in a resilient outcome. The credit market appears to be factoring in a modest slowdown. The government bond market is indicating that a recession is around the corner.
Looking ahead into 2023, analysts are cutting their expectations for profits, and until these stabilize then a sustained upward path for equities maybe delayed.
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