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Earnings expectations begin to reflect recession risks
First quarter 2023 outlook
Following a bear market rally in October and November, global equity markets ended the fourth quarter on a mixed note. U.S. indexes and non-U.S. emerging markets (EM) stocks declined in December, while their counterparts in developed European markets were flattish to modestly positive. Within EM, China was a notable positive outlier. Over the entire quarter, global equities enjoyed solid gains, with nonU.S. stocks outperforming. Inflation appeared to peak late in the quarter and the U.S. Federal Reserve tempered its outsized rate hikes in December, but Chair Jerome Powell made it clear that rate increases would continue until inflation declined to the Fed’s 2% target. Equity markets were torn between celebrating or dreading “bad” economic news. Softer data suggested central bank tightening was finally beginning to rein in inflation, but also intensified fears of a recession in 2023.
- Persistent inflation and tight monetary policy will further slow global economic activity and continue to pressure risk assets.
- Monetary policy generally acts with a lag, so even if the bulk of rate hikes are behind us, their effects have yet to work their way through the economy.
- The trajectory of equity markets hinges on whether and when corporate earnings expectations fully reflect even a modest recession.
- Overall, we have a neutral view on equities. Within the asset class, we favor high-quality U.S. large cap stocks, particularly dividend growers, and select opportunities in health care and real estate investment trusts (REITs).
- We continue to prefer U.S. over non-U.S. equities as we await improved economic and investment conditions in key markets.
Index Performance: FactSet; European Corporate Earnings: I/B/E/S; U.S. Corporate Earnings: Standard & Poor’s; Employment: RBC Global Asset Management; Russell Indexes: FactSet, Russell Investments.
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A word on risk
All investments carry a certain degree of risk, including possible loss of principal, and there is no assurance that an investment will provide positive performance over any period of time. Equity investments are subject to market risk or the risk that stocks will decline in response to such factors as adverse company news or industry developments or a general economic decline. Debt or fixed income securities are subject to market risk, credit risk, interest rate risk, call risk, tax risk, political and economic risk, and income risk. As interest rates rise, bond prices fall. Non-U.S. investments involve risks such as currency fluctuation, political and economic instability, lack of liquidity and differing legal and accounting standards. These risks are magnified in emerging markets. This report should not be regarded by the recipients as a substitute for the exercise of their own judgment. It is important to review your investment objectives, risk tolerance and liquidity needs before choosing an investment style or manager.
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