This year has been that rarest of things, one that has been bad for both equities and bonds, with stocks likely to post their worst calendar year since the 2007–2008 global financial crisis and bond markets suffering their weakest returns in decades.

Equity investors will be glad to put 2022 behind them and they could be forgiven for thinking that things can only get better as we head into 2023. From an equity-market perspective they may well be right, but it's no time for complacency.

Are we out of the woods yet?

It's important we don't get carried away in thinking of 2023 as an entirely fresh start. A lot of the market pressures in 2022 – sky-high energy prices, the broader cost-of-living crisis, tax rises, and rising interest rates – have yet to exert their full impact on the real economy and consumers' pockets. Sadly, the full pain will only be felt next year. We expect significantly slower gross domestic product (GDP) growth in 2023 and the conversation with companies has shifted from supply-chain concerns to the impact of lower demand.

While inflation expectations may have peaked, its full impact on corporate margins will only be seen next year. Wage inflation is the most significant cost uncertainty for many companies. What's more, aggregate market-level earnings forecasts for 2023 have yet to adequately reflect the likely slowdown in GDP growth. This is particularly the case in the UK and Europe where, we feel, earnings expectations may have more than 10% to fall next year.

But markets look forward…

But markets are forward looking, meaning investors tend to anticipate what will happen before it actually comes to pass. History shows us that equity markets typically fall as Purchasing Managers' Indices (PMIs) – forward-looking indicators of economic health in the manufacturing and service industries – fall below a reading of 50, as they have in recent months. But as those PMI readings start to recover towards 50, well before any economic recovery begins in earnest, equity markets often begin to rally. This could well be what we begin to see in 2023.

…and so stocks may find support

Corporate activity is likely to provide support for share prices as both investors and companies start to see opportunities as a result of share-price declines. For example, mergers and acquisitions interest and investor activism remain particularly elevated in the UK. Both are the result of perceived value in the market. We're seeing corporate buybacks continue in the developed markets. This activity is also increasing in parts of Asia, including China. Helpfully we're not seeing corporates hoard cash on a large scale, except at those companies that are already under significant financial stress.

But are stocks really cheap?

The short answer is it depends where you look. While equity valuations have come down sharply for cyclical sectors and are largely pricing in recession, more defensive sectors, such as consumer staples and insurance, are trading broadly in line with their long-term average. Regional valuation discrepancies have continued to widen, with the US market not looking particularly cheap relative to even its own history. Commodity stocks have performed well, but the market isn't viewing current energy and resources pricing as sustainable. In most regions, we still see reasonable value in those sectors.

Key investor takeaways

What does this all mean for an investor trying to plan for next year? Here are three takeaways:

  • This isn’t the time to be indiscriminately buying the cheapest value stocks;
  • High-growth stocks may struggle to recapture their lofty 2021 multiples given the elevated-rate environment;
  • This could be the year for ‘quality’ – profitable businesses with strong cash flows, solid balance sheets, healthy margins and pricing power.

Final thoughts

Equity valuations fell throughout 2022. But with risks to earnings expectations as the extent of the global GDP slowdown in 2023 becomes more apparent, and with uncertainty on the geopolitical outlook ever present, this is still a time for caution. In fact one reason not to get carried away is that a modest recovery in equity markets seems to be a reasonably widely-held expectation among market participants. Over the years, we've learned that it always pays to be skeptical of the consensus view. There may, indeed, be modest upside potential for equity markets next year, but we'd need to see more evidence to support a more bullish view – either for GDP to beat expectations and/or the peak in interest rates to be lower than anticipated. In the meantime, we continue to search for quality businesses at attractive valuations that we feel can serve our clients well in 2023 and beyond.


Foreign securities are more volatile, harder to price and less liquid than U.S. securities. They are subject to different accounting and regulatory standards, and political and economic risks. These risks are enhanced in emerging markets countries.

Trading in commodities entails a substantial risk of loss.

Past performance is not an indication of future results.

Projections are offered as opinion and are not reflective of potential performance. Projections are not guaranteed and actual events or results may differ materially.