One more interest rate increase is anticipated in 2023, before cuts start in 2024. The S&P 500 Index is expected to be relatively flat into year-end with stock prices rebounding in 2024.
The target for inflation in 2023 is 2.9% and 2.8% in 2024. Inflation will likely fall below 3% in 2023 and through 2024. GDP (gross domestic product) growth target for 2023 year-end is 1.1%, and 1.5% for 2024. Profits should rebound through 2024, as the economic recovery gradually takes hold, but corporate earnings may not recapture their 2022 peak until early 2025. WFII believes that earnings will contract further in 2023, and that an economic recession will stall 2023 corporate revenue growth. While the markets realign with these trends, there is potential for these disjoins to create financial-market volatility. Further, actual earnings have contracted for two consecutive quarters, but markets expect earnings to grow. For example, the Fed's stated policy is to keep rates high while high inflation persists, but markets expect rate cuts. Drivers of this elevated volatility include potential inconsistencies between actual economic and policy trends versus the market’s perceptions of those trends. “There will come a time to turn more opportunistic in positioning portfolios for a recovery however, we need to respect the signals and understand when the risk and reward dynamic changes.”įor the remainder of the year, WFII anticipates periods of elevated volatility, especially as financial conditions tighten in the second half of the year. “Protecting capital during more challenging times is often as important, or more important, than growing capital,” said Darrell Cronk, chief investment officer for Wells Fargo Wealth & Investment Management.
For now, the important objective for investors is to understand how recessions evolve and to position defensively.
WFII suggests that investors should have a chance to position for an eventual 2024 recovery, but they might have to do so while the economy is still within the grips of the anticipated recession. Wells Fargo Investment Institute 2023 Midyear Outlook (Graphic: Wells Fargo)
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