Outlook: A Volatile Start Could Present Opportunities in 2023

Highlights

• The economic cycle appears in transition from late expansion to downturn. Pinpointing the downturn’s starting point is challenged by encouraging corporate earnings growth and only a marginal bump in global unemployment rates, yet the lagged effect of monetary policy could prevail, adding downward pressure on earnings and economic growth.
• Equities could struggle. Tighter financial conditions along with an unclear economic view and central bank moves could mean lower earnings estimates and weaker corporate fundamentals like revenue growth and profit margins.
• Government policy. Excessive inflation could limit the monetary and fiscal response to the next downturn. The Loomis team does not think investors should expect a wide sweeping rescue, particularly if the downturn begins in mid-2023.
• Inflation. Despite indications of inflation having peaked, the battle has not been won. Inflation pressures could keep central bankers uncomfortable through the first half of the year. Should inflation head lower, the Fed could pause after a likely 25 basis point February hike.
• Credit opportunities. Loomis Sayles’ risk premium framework suggests underlying US credit fundamentals are currently solid, potentially pointing to an “above median” possibility for positive excess returns over the next six months. Over the longer-term, bumpy 2023 markets could present investment opportunities for global credit.