Market Overview & Outlook Quarter 1 2023 (1 January – 31 March 2023) – Markets Make a Good Start to the Year

Equity Markets

Following a particularly weak 2022, global equity markets experienced a positive start to the year, with most major indices posting gains throughout the first quarter. The FTSE 100 reached a new all-time high in January, whilst we witnessed strong rallies particularly in those indices which performed poorly in 2022, such as the ‘Tech-heavy’ NASDAQ index. The Technology sector has been boosted by a comparatively strong earnings season to date as well as signs inflation is peaking. Chipmaker Nvidia was a notable performer having posted strong results and announced greater involvement in artificial intelligence. Energy was amongst the weakest sectors with investors eyeing potential cost pressures.

To date, corporate earnings season has been mixed, with the majority of companies meeting or beating expectations for the most recent quarter but then offering weaker guidance for the remainder of the year. Whilst commodity prices have softened and supply chain issues appear to have subsided, wage inflation and higher costs of debt will likely cause downward pressure on margins. In order to combat this, we have witnessed a number of companies reducing headcount and tightening spending budgets. Whilst robust at present, the level of consumer demand over the medium-term also remains uncertain as strong personal balance sheets which were built up throughout the pandemic begin to unwind.

In terms of valuation, the S&P 500 currently trades at 17.5x forward earnings, marginally below the five-year average of 16.5x. The FTSE 100 stands at 14.5x, also slightly below its long-run average.

Bond Markets

The bond market has faced a more challenging quarter so far, with rising inflation fears and increasing interest rates causing a further decline in bond prices. Credit risk has also come in to focus as Fed tightening is likely to result in slowing economic growth which could affect bond credit fundamentals. This has led to negative returns for bond investors, particularly in the government and high-yield bond sectors. That being said, the yield curve remains inverted, suggesting the market is pricing in a rally in bond prices over the course of the remainder of the year.

Macro Environment

Market sentiment shifted slightly in February as concerns over rising inflation and interest rates led to a sell-off. Interest rates remain a key concern for investors, with the Federal Reserve signalling a willingness to continue to raise rates to combat high inflation. However, there is still a school of thought amongst some investors that inflation may still turn out to be transitory and that the Fed may soon start to pause and even begin to cut rates later this year, leading to a potential market rally. The implied probability of a broad recession later this year has also reduced slightly in recent weeks.

Geopolitical tensions continue to be a wildcard for the markets; with the Russian occupation of Ukraine being the standout issue which we have covered previously. We may also hear more regarding the importance of China as the year continues. On the one hand, as China continues to ‘re-open’ its economy, investors and economists will closely monitor the effect this has on global demand, notably regarding the prices of energy and raw materials. On the other hand, there remains a disturbing undercurrent to tensions between China and the West, centring around intellectual property which has manifested in US sanctions on microchip design in certain geographies and most recently, the bizarre scenario in which a suspected Chinese ‘spying device’ was shot down over the coast of North America.


Looking ahead, despite persistent geopolitical and macro challenges, there is reason to be optimistic at the company level for the remainder of 2023. The probability of a global recession has reduced, the jobs market remains robust, as does consumer confidence, at least for now. PMI business surveys also show an improvement in the economic outlook across the major developed market economies. The headline composite survey rose above 50 into expansionary territory in the US and UK, while the eurozone remained in positive territory too. The employment components of the surveys were also above 50 in the US, UK and eurozone, confirming that the labour market remains tight, especially for the services sector. Despite news of wide-spread job cuts in the ‘mega-cap Tech’ stocks, wages at the low end have been rising significantly which is dragging people back to employment, following the pandemic. Overall, this should be a positive for a broad-based economic recovery.

Following broad market selloffs in 2022, equity valuations now look attractive in the main, which gives us cause for cautious optimism for the coming year.

Please note, our Market Overview & Outlook is our view of markets and does not constitute investment advice. Past performance is not necessarily an indication of future returns; the value of investments and any income from them is not guaranteed and can fall as well as rise. Overseas investments are affected by currency movements and exchange rates. If you would like investment advice on your individual circumstances, please do not hesitate to get in touch, telephone 01392 875500,

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