Based on the initial market action in 2023, it appears that investors’ New Year resolutions are as follows: Keep Big Tech in the penalty box, place some bets on the outperformance of foreign stocks. outside, while also hunting for bonds of all kinds for good yields and maintaining some hope that an elusive soft economic landing is still possible. No one needs to be reminded that year-end resolutions often fade in the face of changing circumstances. Recall that early last year, the popular bet was to smoothly and painlessly pivot from expensive growth stocks to financial and cyclical stocks. That didn’t last long: The S&P financials sector overtook the utilities sector by 7 percentage points in the first week of 2022 alone. From that point through the year, the utilities sector outperformed the sector. finance up to 17 percentage points. However, the market has revealed some clear preferences in the early days, some of which are simply carried over from 2022. These include continued easing of the huge valuation premium. and investor sentiment is too optimistic for the Nasdaq giants. Tech Relax Continues Ongoing since November 2021, the deflation of tech favorites has recently entered a new phase with Apple stock peaking and liquidation. emergency management at Tesla, causing it to lose about three-quarters of the 1,800% gain the stock enjoyed in the two years before peaking in late 2021. It is generally viewed as largely a reaction to interest rates. higher, reducing the present value of distant cash flows. But rates are always only part of the story both up and down. In fact, since 10-year Treasury yields peaked on October 24, the Nasdaq 100 has fallen nearly 4% while the equally weighted S&P 500 has gained 8%. Forecasts of falling profits colliding with still-rich valuations tell the more relevant story. Since mid-2022, the 2023 consensus forecast earnings for Amazon have fallen by 30%. As for Alphabet, it’s down nearly 20%. These companies used to have reliable growth when growth was scarce, they hired too many people because they believed the good times would last, and analysts over-extracted growth. during the pandemic. One could argue that much of the technological computation has already happened. The Nasdaq 100 futures price/earnings ratio has actually fallen from 31 a year ago to less than 21 today. Some stocks leading lower are said to have been completely washed out and not expensive. Some investors who have clearly entered the year feel that, for example, Meta Platforms and PayPal fall into this category of bankruptcy “risk-free” growth stocks, each up 8% on the week. prior to. Still, the Nasdaq 100’s spread over the S&P 500 as a whole remains at 25% — higher than at any point in the decade before the pandemic hit. And the history of previous tech bankruptcies, such as after the 2000 market peak, shows that this group can have a long time in the wild even after they stop going down, lagging behind. with wider bandwidth for many years. Foreign stocks than US? And the broader band, as measured by the equally-weighted S&P 500, continues to outperform the leading headline-heavy index. This basket of equality, purchasable through the Invesco S&P 500 Equal Weight ETF (RSP), is up 16% from fall lows, less than 12% off record highs, and has broken new cyclical highs against the traditional S & P 500. The positioning and poor performance of large growth stocks is also a factor in favoring emerging stocks in foreign markets. The dominance of US tech stocks has been a big part of the US indexes’ outperforming the rest of the world over the past 15 years. There are now hints of a potential reversal. The group of non-US markets — see iShares ACWI ex-US ETF (ACWX) — gained more than 4% last week compared with 1.5% for the S&P 500. The dollar is near a seven-year low. month. China is reopening and the European market is leaning towards value industries and exporters. Bank of America global strategist, Michael Hartnett, made the call to “Buy the World” versus the US for those and other reasons. Citi’s global strategists on Friday downgraded US stocks to lower levels, saying European stocks, in particular, are priced higher for the potential for earnings declines than US equities. Such calls for an international return have been made several times over the past decade to no avail, although the time may be more ripe now. Overestimating U.S. returns is a widely shared and valid one, although it is hard to be certain that the market is unaware of this. Low Expectations Morgan Stanley shows this chart plotting the S&P 500 forward earnings against the index’s forward P/E is proof that returns will drop significantly. Presumably, though one can also read this as markets generally predict earnings trends will change and it’s likely that a good portion of the past year’s valuation compression reflects the risk that returns will more chance of falling. It’s also important to note that Wall Street’s current forecast for 4% earnings growth for the S&P 500 is, somewhat surprisingly, the lowest forecast for next year in at least 35 years, according to Deutsche Bank. And this includes some years when earnings ended in negative — and in some of those years the stock didn’t drop (1998, 2012, 2015, 2020). Putting this on the record is evidence that, whatever the problem of this market, optimistic expectations are not among them. Bears have overtaken bulls for the first time in 40 consecutive weeks in the AAII retail investor poll, active managers in the NAAIM positioning survey have shown The historically low share ownership rate of 39% last week and the final weeks of 2022 saw capital outflows from equity. fund. None of that means that the market has absorbed all that a complex macro environment has caused it. Stocks celebrated evidence of a slowdown in wage growth and services prices on Friday, after three weeks of tight sideways trading at a 20% drop of 3800 for the S&P 500. remains in a downtrend, until proven otherwise and the Federal Reserve could certainly once again push back against investors for celebrating too soon the possibility of an end to tightening moves. However, high consumer incomes and low debt payment obligations between households and firms are buffers that help maintain the soft landing scenario for now. Can housing and manufacturing ease up a bit to decompress the economy, while overall activity is in disarray? No one knows, but no one can confiscate the opportunity either. Henry McVey, head of global macro at KKR & Co., wrote on Friday, “We’re in the process of bottoming out as supply, sentiment and pricing (especially on the credit side of things) application) seems a bit tempting, but unrealistic profit assumptions and a strong US dollar mean this process will take longer than usual to happen.” The allure of credit is in the spotlight, with strong capital outflows into bond funds absorbing a massive issuance of new companies last week, a healthy sign of the circular system of capital markets are doing well. Higher yields, with investment-grade indexes offering 5%, are often said to provide stiff competition for stocks. Outwardly, yes. But the presence of a safe return – or “carry” in fixed-income parlance – in a portfolio can also help reduce volatility in equity and, in fact, allows investors to better take on the risk that stocks carry. Recession predictions, based on a long history of yield curve-related data relationships and Leading Economic Indicators, also cannot be dismissed, making the picture a bleak picture. tension between a tough-voiced and wary Fed letting the economy give way. However, if nothing else, the starting point for 2023 will be better for an investor than it was a year ago. Back then, someone who bought the S&P 500 with earnings of 21 times expected could get a yield of no more than 1.8% on the 10-year Treasury note, and the Fed has tightened it all up ahead. Now, the S&P is under 17 and at the 20-year average, with the 10-year yield double and the Fed almost done raising rates. That is not to say that everything is cheap and attractive in terms of forward returns, but it should be remembered that as asset prices and valuations decline, risk exits the market and potential future returns are being realized. rehibilitate.