1st Quarter 2023

The first quarter of 2023 was a volatile but rewarding period for equity markets, as investors balanced the risks of rising inflation, banking turmoil, and slowing global growth with the opportunities of lower interest rates, resilient earnings, and technological innovation. Despite some sharp swings in February and March, stocks ended the quarter with solid gains across regions and sectors. According to Morningstar, the global equity market returned 7% in Q1 2023, with international large cap stocks leading the way (+8.5%) and U.S. large cap stocks following closely (+7.4%). The best performing sectors were information technology, communication services, and consumer discretionary, while energy, health care, and financials lagged behind.

 

One of the main drivers of equity market performance in Q1 2023 was the Federal Reserve’s monetary policy stance. The Fed raised its benchmark interest rate seven times in 2022 to combat inflation, which reached double-digit levels last year. However, in January 2023, the Fed signaled a pause in its tightening cycle, citing signs of moderating inflation growth and weakening economic activity. The Fed also launched a new lending program to support the banking system after the collapse of three major banks: Silicon Valley Bank, Signature Bank (NY), and Credit Suisse. These failures sparked fears of a credit crunch and a systemic crisis, but the Fed’s swift intervention helped to restore confidence and liquidity in the financial sector.

 

Another factor that influenced equity market performance in Q1 2023 was the pace and quality of corporate earnings. Despite facing higher costs, supply chain disruptions, and regulatory pressures, many companies reported strong results for the fourth quarter of 2022 and issued upbeat guidance for 2023. According to FactSet, the blended earnings growth rate for the S&P 500 was 21.8% in Q4 2022, beating expectations by 5.9%. The sectors that reported the highest earnings growth were information technology (+37.6%), communication services (+32.4%), and consumer discretionary (+28.9%). For 2023, analysts expect earnings growth to slow down to 9.7%, but still remain above the historical average of 6.9%.

 

Looking ahead to Q2 2023 and beyond, equity markets face several uncertainties and challenges that could affect their performance. Some of these include:

The top of this list, in the near future, is the ongoing discussions within Congress addressing the debt ceiling crisis.  Neither side appears willing to compromise on their party’s stance.  The possibility, however remote it is perceived to be, of a Treasury default could be catastrophic for the financial markets.  The repercussions that have been put forth include dramatically increased borrowing costs for fixed income market (both corporate and governmental), dramatically lower stock prices and the loss of confidence in the US dollar, the current global reserve currency.

– The impact of the banking crisis on the real economy and credit availability

– The evolution of inflation and its implications for monetary policy and corporate margins

– The outcome of trade negotiations between the U.S. and China and other major economies

– The pace of innovation and disruption in key sectors such as technology, health care, and energy

– The geopolitical risks posed by conflicts in Ukraine, Taiwan, Iran, and North Korea

 

Given these factors, investors should be prepared for more volatility and diversification in equity markets in Q2 2023 and beyond. While there are still opportunities for growth and value in various regions and sectors, there are also risks that could derail the market’s momentum or trigger a correction. Therefore, investors should adopt a long-term perspective, focus on fundamentals, and seek quality companies with sustainable competitive advantages and attractive valuations.

 

The opinions expressed herein are those of Riverbend Planning Group. The data and opinions are furnished for informational purposes only and should not be considered a solicitation for an investment decision. Although it is derived from sources believed to be accurate, Riverbend Planning Group makes no guarantee to the accuracy of the information

Back to Blog