SUMMARY
The 2023 economy remains uneven, but it has exceeded most investors’ bearish expectations – even our own.
- The performance of the economy in 2023 remains uneven, but it has exceeded most investors’ bearish expectations – even our own. Some of our own concerns haven’t materialized, leading us to raise our allocation to global equities.
- The recent inflation news is particularly good for markets. Inflation is slowing even faster than the labor market. Moderating energy costs pulled headline US consumer prices from a peak above 9% to just 3%. We think these developments will ultimately set the stage for the Fed to begin turning away from restrictive monetary policy, most likely in 2024.
- Wall Street research analysts have cut their estimates for Q2 earnings, lowering the bar for success. Annualized Q2 estimates fall 14% compared to Q1. But these same forecasters estimate earnings in Q3 will surge and grow rapidly. In a slowing economy, this makes the possibility of 2H2023 disappointments higher.
- Technology shares have outperformed bank shares considerably this year and broadly for the decade past. The increased regulatory scrutiny faced by banks since the Great Financial Crisis is, in part, responsible as higher capital requirements limit growth and risk. With inflation cooling and reduced economic tail risks, we expect a near-term boost in financials. This is true for banks and publicly traded private equity firms as noted herein.
