Inflation, recession and earnings are among the factors driving US stocks in 2023 By Health & Fitness Journal

©Health & Fitness Journal. FILE PHOTO: A trader works on the trading floor of the New York Stock Exchange (NYSE) in New York City, U.S., December 14, 2022. REUTERS/Andrew Kelly

By Lewis Krauskopf

NEW YORK (Health & Fitness Journal) – U.S. equity investors couldn’t be more eager to turn the page in 2022, a brutal year dominated by market-punishing Federal Reserve rate hikes in a bid to curb the steepest inflation in 40 years.

It’s down nearly 20% year-to-date, with less than one trading day remaining in 2022, the biggest drop in a calendar year since 2008. The carnage was even more severe for the , which is down almost 34% so far this year.

High-profile casualties include once-spiky shares of Amazon.com Inc (NASDAQ:), which have plummeted around 50% this year, while those of Tesla (NASDAQ:) Inc and Facebook parent Meta Platforms Inc (NASDAQ 🙂 both lost about 65%. Meanwhile, energy stocks have bucked the trend by posting stunning gains.

CHART: Timeline of the S&P 500 (

Inflation, and the Fed’s level of aggressiveness in trying to contain it, will likely remain a critical factor driving stock performance into 2023. But investors will also be paying attention to the implications of higher interest rates, including how tighter monetary policy is affecting the economy and whether it makes other assets more competitive versus stocks.

Here’s a look at some of the big themes for the US stock market in 2023.

RECESSION OR SOFT LANDING?

Perhaps the biggest question affecting stocks as the new year begins is whether the economy is headed for a recession as many investors are anticipating.

If a recession hits next year, stocks could be set for another slide: a bear market has never bottomed before a recession hits, historical data shows.

Recessions tend to hit stocks hard, with the S&P 500 falling an average of 29% in recessions since World War II, according to Truist Advisory Services. However, these declines were usually followed by strong rebounds.

GRAPH: S&P 500 bounces back around recessions (

WIN AT RISK?

Investors are also concerned that corporate earnings estimates may not have fully factored in a possible slowdown, creating further downside risks for equities.

Consensus estimates from analysts last week called for a 4.4% increase in S&P 500 earnings in 2023, according to Refinitiv IBES. However, according to Ned Davis Research, earnings fall an average of 24% annually during recessions.

GRAPH: S&P 500 Earnings, Annual Change (

Goodbye, Tina?

The Fed’s rate hikes have pushed up bond yields and created competition for stocks, contradicting the low interest rate environment that has prevailed for more than a decade, giving rise to the acronym “TINA” or “there is no alternative stocks”.

Yields on 10-year Treasury Inflation-Protected Securities (TIPS) — also known as real yields because they discount forecast inflation — were recently around 1.6%, after hitting their highest level in over a decade in October.

Still, some investors have noted that stocks have performed well in earlier periods when yields were higher.

CHART: Rising US Treasury yields and stock performance (

CAN VALUES CONTINUE?

Over the past year, value stocks — commonly defined as those that trade at a discount to metrics like book value or price-to-earnings multiples — have held up better than technology and other growth stocks, reversing trends that have been in place for much of the year were past decade.

With higher yields and doubts about earnings growth putting pressure on technology and growth stocks, one wonders whether Value – which is more strongly represented by financials, energy and defensive groups – could be poised for another year of outperformance.

CHART: Value vs Growth Stocks (

DOLLAR MAKING A DENT

The dollar’s rise against other currencies this year has hurt profits for many US companies and made it more expensive for multinationals to convert profits back into their home currencies.

The greenback has given back some of those gains over the past few weeks, and further reversal would depend in part on how hawkish the Fed will be relative to other global central banks.

GRAPHIC: FX Pain (