A gloomy winter A gloomy winter http://www.federatedinvestors.com/static/images/fhi/fed-hermes-logo-amp.png http://www.federatedinvestors.com/daf\images\insights\article\mountains-low-clouds-gloomy-small.jpg December 22 2022 December 29 2022

A gloomy winter

Three things to watch in 2023.

Published December 29 2022
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Inflation and the Federal Reserve’s response While inflation has probably peaked, it remains elevated and is unlikely to hit the Fed’s 2% target before the end of 2024. At its policy-setting meeting on Dec. 14, the Fed slowed the pace of rate hikes to a half-point increase (after four consecutive 75 basis-point hikes), which took the fed funds range up to a 15-year high of 4.25-4.50%. In their latest SEP, policymakers forecast they will raise the range to 5-5.25% by mid-2023 and hold rates there until 2024. They also project that in 2023 GDP growth will slow to 0.5% and the unemployment rate will increase to 4.6%. 

Corporate earnings disappointments could push stocks lower Last June, FactSet expected fourth quarter S&P 500 earnings to grow 10% on a year-over-year (y/y) basis. But today, those estimates have shrunk to a y/y decline of 2.4% due to elevated inflation, rising interest rates and slimmer profit margins. When companies begin to report these results in mid-January, we expect cautious management guidance due to the risk of recession and rising labor, commodity, transportation and warehousing costs. So in November, we reduced our outlook for earnings in 2023 from $230 to $200 and from $250 to $220 in 2024. EPS in 2021 was $209, and our forecast for 2022 was $220. In early July, the consensus was for 2023 earnings to reach $250, but that projection has since declined to $234.

Keep the defense on the field 2022 was a difficult slog for equity investors, with the S&P plunging 27.5% from its beginning to Oct. 13. Stocks then staged a midterm election rally over the ensuing two months to Dec. 13, surging 17.5%. We do not believe this rally is sustainable. If earnings do decline because of slowing economic growth and slimmer profit margins and P/E’s contract due to elevated inflation and higher interest rates, stock prices could retest their mid-October low of 3,500—or perhaps lower. We continue to emphasize “stable demand” equity-market categories, such as energy, health care, consumer staples and utilities. These tend to have lower P/E ratios, less risky beta profiles and higher dividend-yield support.

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Tags 2023 Outlook . Markets/Economy . Monetary Policy . Inflation . Equity .
DISCLOSURES

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Gross Domestic Product (GDP) is a broad measure of the economy that measures the retail value of goods and services produced in a country.

Price-Earnings Ratio is a valuation ratio of a company's current share price compared to its per-share earnings.

S&P 500 Index: An unmanaged capitalization-weighted index of 500 stocks designated to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. Indexes are unmanaged and investments cannot be made in an index.

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