Inflation, rate hikes and earnings top list of equity risks

Despite a midsummer rally that saw many markets jump by double-digits following a dismal first half of the year, global equities couldn’t hold their gains in September and ended the third quarter of 2022 in negative territory. In the U.S., the temporary rebound was driven by optimism that inflation might peak quickly, that the U.S. Federal Reserve would pivot from its aggressive rate hikes soon, and that the economy could emerge relatively unscathed — hopes that diminished as the quarter wore on. Non-U.S. stock markets also fell broadly during the quarter, with losses magnified when translated into dollar terms due to relentless strength in the U.S. currency.

KEY TAKEAWAYS

• Lack of clarity regarding the economic cycle is limiting insights into how corporate earnings will progress from here.
• A combination of slowing growth, tightening financial conditions, higher input prices, lingering supply chain pressures and worsening corporate sentiment has equity markets worried about downside risks to earnings estimates.
• As tighter monetary policy takes a larger economic toll, any evidence of deteriorating fundamentals could prompt further de-risking.
•  Overall, we have a neutral view on equities amid concerns about growth and company profits. We see some potential opportunities in quality U.S. large cap stocks, particularly dividend growers, along with select health care and energy names.
• A lack of positive catalysts leads us to be cautious on non-U.S. equities, with minimal appetite for expanding allocations until we see economic and investment conditions improve in key markets.
• Volatility and uncertainty aren’t going away any time soon, making it as important as ever to stay invested and focused on the long term.