The S&P 500 Index fell -24.8 percent in the first nine months of 2022, with 10 of 11 GICS sectors producing negative returns. Valuation compression has been the key driver of year-to-date equity losses, as the surge in ten-year Treasury yields and drop in excess liquidity have contributed to a broad-based contraction in stock price-to-earnings multiples. As a result, the S&P 500 is currently trading at about 15.3 times forward earnings, which is in line with its long-term average. Consensus earnings forecasts will come under increasing pressure in the coming months as economic growth wanes and sell-side analysts catch up with what the equity market has already discounted. That is, we believe U.S. equity valuations generally reflect a mild recession scenario.

Investors fear the Federal Reserve will continue to raise interest rates until something breaks. Likewise, the risk of a policy overshoot that upends the global economy is rising as the highest number of central banks on record tighten concurrently. The combined effects of slowing economic growth, rising interest rates, a stronger U.S. dollar, and falling asset values will undoubtedly expose vulnerabilities somewhere on the globe. But, unless the Federal Reserve makes a colossal error, we believe the U.S. will undergo a conventional cyclical downturn and not a repeat of 2007-2009. Albeit, some indicators look downright gloomy. While the economic landscape will likely be challenging for the next year or so, the stock market is a forward discounting mechanism, trying to look ahead by around 12 to18 months for better days.

For our latest full Global Investment Outlook & Strategy Update, download the .pdf document.