iShares 2023 Midyear Outlook

Gargi Pal Chaudhari Jul 06, 2023


  • Holding tight. Higher for longer interest rates support allocations to high quality fixed income.
  • Pivoting to new opportunities. Equity markets are priced for an optimistic outcome; investors may want to consider steering towards a defensive stance.
  • Mega-forces, mega soon. Trends such as demographics and artificial intelligence are impacting present day returns, not just in the future.


The first half of 2023 has been characterized by opposing narratives. In the recessionary data camp, we’ve seen a slowdown in the manufacturing sector coupled with tighter credit conditions following March’s banking turmoil. Excess savings rates have fallen, especially in lower income households.1 On the soft-landing end of the spectrum, however, the labor market remains incredibly robust, with unemployment rates hovering near all-time lows.2 Inflation has moderated only slightly, despite the Federal Reserve hiking interest rates 500bps to levels not seen since 2007, pointing to a resilient consumer buoyed by stable earnings potential as wage growth remains firmly above the pre-pandemic decade.3

Still, despite divergent signals in the macro data, financial markets kicked off the year with a stellar start — seven of the eleven S&P GICS sectors are in the green, and most financial assets have outperformed cash allocations so far in 2023 (Figure 1). While many point to the artificial intelligence (AI) boom as a driver of the market rally, a closer look tells a broader story: the trimmed mean performance of the S&P 500 (removing the top and bottom 10 performers) has returned 8.8%, suggesting that the equity market is pricing in an optimistic outcome on both growth and earnings, in our view.4

Figure 1: Total return across asset classes

Chart showing the total return across asset class

Source: BlackRock, Bloomberg, chart by iShares Investment Strategy. As of June 20, 2023. Index performance is for illustrative purposes only. Index performance does not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results. Index performance is measured by the following indexes: EM Equity: MSCI Emerging Markets IMI Index; Gold: ICE LBMA Gold Price Index; S&P 500: SPX Index; Bloomberg US Agg: Bloomberg US Aggregate Bond Index; World ex-US: MSCI World Ex USA Index; Cash: ICE BofA 0-3 Month US Treasury Bill Index.

We think that outcome is far from certain given the disparities outlined above, but expect the second half of 2023 to be driven by three main narratives:

  1. The Federal Reserve nearing the end of its hiking cycle and pausing on rate hikes, which could allow duration in the belly of the curve to return as a ballast in portfolios.
  2. Inflation remaining sticky, much above the Fed's 2% mandate, allowing for interest rates to remain high for the near term. Investors may want to focus on the growing role of bonds as an income generator in portfolios.
  3. Corporate profitability coming into question as firms grapple with higher input costs, which means focusing on companies with strong balance sheets and margin resilience remains paramount.

We believe that this is an investment regime where nimble asset allocation and a willingness to tweak portfolio positioning to adjust to the macro data is prudent. ETFs can be an important tool to do so efficiently.



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Gargi Pal Chaudhuri

Gargi Pal Chaudhuri

Head of iShares Investment Strategy and Markets Coverage, Americas

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