Stock market monitor

  • Nigel Bolton

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.

Key points


Opportunity in volatility

We believe stock-market leaders will come from a wider number of sectors in 2023 amid persistent inflation, providing opportunities for active managers.


Three fundamental principles

As interest rates rise in a new economic regime, we re-emphasize three principles: selectivity is key, profit margins matter, and valuations are vital.


Eyes on the consumer

Consumer spending – key to company fortunes – remains resilient. Yet we see signs of weakness and are closely watching house prices.

Selectivity is key as new stock-market winners emerge

Equities have a key role to play in investment portfolios, even as higher rates boost the yield (and relative attractiveness) of bonds. Company earnings are boosted by inflation. Higher prices of goods and services mean higher revenue. So we could see positive earnings next year, in our view. But company costs are also increased during periods of inflation, so we expect to see greater dispersion between the winners and losers – those companies that can generate cash and control costs versus those that can’t. We expect market volatility to provide long-term investors with opportunities – provided they focus on profit margins and valuations.

Profit margins matter in new era

The World Profitability factor versus the World Growth factor, past 24 months, in USD terms

The figures shown relate to past performance. Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in a factor. Source: BlackRock Fundamental Equities, MSCI, November 2022. The chart shows the performance of the World Profitability factor versus the World Growth factor. The profitability factor is based on several standard profitability ratios which measure the magnitude of company earnings relative to expenses, such as return-on-equity, return-on-assets and interest coverage. The growth factor is based on measures such as historical earnings, sales and predicted earnings. These factors strip out any industry effect, currency impact, country impact and other style effects such as value.

Higher rates bring focus on profit

In recent years, cheap financing in the form of low rates meant that companies could focus on long-term growth without worrying about shorter term profitability. Now we believe profit matters again.

Profit outperforms growth

The chart shows how profitable companies have been rewarded over the past 12 months while companies characterised mainly by growth have suffered.

The importance of pricing power

Pricing power is key to profitability. But companies say it’s going to be harder to pass on costs as global growth slows. We believe this may widen the gap between the stock market winners and losers.

Valuations are vital

Higher rates bring more focus on short-term cash flow, and equity valuations are taking on renewed importance. We look for companies that may achieve earnings upgrades yet remain relatively cheap.

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Risk warnings

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.

Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.

Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time.

Important information

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