Five Key Questions
4min video
As we look ahead to 2023, several key questions need to be answered this year, as they will significantly impact financial markets. Here are five questions that we believe will be critical to watch …
Video transcript:
1. Where will expectations for 2023 S&P 500 earnings ultimately land?
Over the past year, earnings estimates for the S&P 500 have fallen from $245 per share to around $220 per share. This drop has implications for the valuation of stocks, as a lower earnings estimate leads to a lower "fair value" for the S&P 500. By the end of January 2023, we will have a clearer picture of the consensus expectations for S&P 500 earnings, which will influence the direction of stocks at the start of the year, but remember, markets are forward-looking, so they will already be pricing in expectations for 2024 by that point.
2. When will global bond yields peak?
Global bond yields, including those for U.S. Treasuries, have been rising due to factors such as the Truss-o-nomics crisis in the UK, the European Central Bank's hawkish stance, and the Bank of Japan's increase in the trading band for its 10-year government bonds. For global stocks to recover, global bond yields must reach their peak. However, this may be challenging if German bund yields and Japanese government bond yields continue to rise.
3. When will core CPI drop below 5% year-over-year?
The Federal Reserve focuses on controlling services inflation, which makes up a large portion of core CPI. The December CPI report showed that core CPI was 6.0% year-over-year. The Fed will be closely watching this indicator to determine when to pivot on inflation control measures, with the goal being to bring core CPI down below 5.0% year-over-year.
4. When will the unemployment rate rise above 4.0%?
The Federal Reserve wants to see the labor market come into better balance or have more unemployed people before it can be confident that inflation is significantly decreasing. An increase in the unemployment rate, which is currently at 3.5%, could indicate that the Fed's interest rate hikes are helping restore the labor market balance. If the unemployment rate rises above 4% early in 2023, it could signal that the Fed's efforts are paying off.
5. When will the 10s-2s bottom and reverse?
The movement of the Treasury yield curve, specifically the 10-year and two-year treasuries, and the spread, or the difference in their yields, is a metric that can provide insight into when the bond market believes the Federal Reserve will pivot on its monetary policy. If the 10s-2s spread bottoms out and start to rise, and gets tighter, right now, it’s inverted, meaning you are getting paid to lock your money up for two years than if you locked it up for 10yrs, it could indicate that the bond market is forecasting slowing economic growth and decreasing inflation, which would lead to a decline in the 2-year yield and an increase in the 10-year yield. This reversal of the 10s-2s spread could signify that a Fed pivot on monetary policy is on the horizon.
So the bottom line is this: each of these five questions are important in their own way and meaningful metrics to keep an eye on as this year gets started. So I hope this quick video gives you some insight into what will dictate the Federal Reserve’s policy and, subsequently, the stock market this year.
As always, stay on point. Take care.
