At mid-year, concerns of recession may feel far-fetched: Consumption has been resilient, inflation is slowing and the economy is sailing along. But forward-looking indicators are weakening, and the Fed rate hike cycle may not be over. Meanwhile, market performance year to date reflects some complacency around the economy. In Q3, we expect a slower economy to weigh on markets. Against this macro backdrop, it will likely be tough to find the catalyst for further gains with valuations high and extreme concentration in traditional indices.
- Multiple forward-looking indicators point to a slowing economy, at best, and are historically leading indicators of a recession.
- The market has come around to our view that Fed rate cuts are unlikely in the next year. We expect the Fed to remain hawkish, alongside other major global central banks.
- Real yields have jumped but equity valuations are increasingly expensive. This may reflect Goldilocks expectations on both inflation and growth, which should be actively managed.
The start of 2023 has been anything but recessionary. Headline GDP is still being heavily influenced by massive inventory swings, but through noise-cancelling headphones, the drumbeat of steady domestic demand is clear. The U.S. economy sustained tremendous tailwinds from the pandemic reopening, COVID and other fiscal stimulus, and the tightest labor market most of us have seen in our lifetimes. The economic data in the first half of the year reflect these tailwinds, and as growth has sailed along, markets have increasingly dismissed concerns about a recession that were so pervasive at the start of the year.
For several reasons, we think this outlook may be too sanguine. Our forecast has included a mild recession, but we have been clear we expect the timing to be the end of 2023 at the earliest.
Read the complete Q3 2023 Economic outlook to learn more.