2023 Mid-Year Market Outlook: Out of the Woods?

Most of the things we expected to happen during the first half of the year in fact did: Inflation eased, U.S. economic growth slowed, the Federal Reserve appears to be near the end of its rate-hike cycle, and the U.S. government debt ceiling standoff was resolved before a potential default.

One thing we didn't expect was the strength of the broader stock market. We had believed equity markets could face rough sledding in the first half, leading to a sunnier second half. In fact, the S&P 500® index was up more than 13% year to date as of June 14th, while the Nasdaq composite was up more than 30%—an unexpectedly strong performance, albeit driven by a handful of mega-cap stocks.

Fixed-income market returns were positive through early June for nearly every asset class, from short-term Treasuries to high-yield corporate bonds, and we generally expect more of the same in the second half. We still find international stocks attractive, bolstered by more-attractive valuations and faster earnings growth, while recognizing that a surge in artificial intelligence (AI) stocks could further boost U.S. equities on a relative basis.

So are we out of the woods yet? No. The U.S. stock market could still experience bouts of volatility or weakness linked to ongoing uncertainty about Fed policy, weaker corporate earnings, possibly frothy investor sentiment, and the risk that the "rolling" recession—which has affected various geographies and industries at different times—will roll into a formal recession. Read on for a summary of our current views, with links to more detailed reports.