Where next for equity markets?

  • Helen Jewell
  • 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.

A new year has brought renewed optimism in equity markets. Stock markets in the U.S. and Europe have bounced back in 2023 after dramatic drops last year. So will this year be positive for stocks markets? We believe it can be, but expect more volatility along the way – presenting attractive entry points for long-term investors. Our thoughts as we debate the direction of equity markets:

  • Cautious on near-term rallies: We see more market volatility due to sticky inflation and the impact of central bank tightening
  • Fundamentals matter: As the era of cheap money ends, we believe individual company merit will matter more to investors
  • Active opportunity: Volatility may present attractive entry points for long-term investors who focus on profit margins and valuations

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Focus shift: from macro to fundamentals

Two of the main reasons for the equity market revival, in our view, are the decline in global inflation from very high levels (and so a more stable interest-rate outlook) and China’s lifting of COVID-19 restrictions. We don’t expect these trends to go into reverse.

Yet we believe that central bank efforts to dampen inflation may bring volatility and begin to impact corporate earnings, and we see a wide gap opening up between those companies that can prosper in a slower growth and higher interest rate environment – and those that can’t. Read the Q1 Stock Market Monitor for more insights. In 2022, macroeconomic shifts around inflation and interest rates drove markets. We believe the focus will now shift to company fundamentals.

The rise and fall of U.S money supply
U.S. M2 Money Supply Growth v Consumer Price Inflation 1992-2022

The rise and fall of U.S. money supply

Source:, with data from Federal Reserve Bank of St. Louis, United States Census Bureau, Robert Shiller Online Data, Congressional Budget Office, Feb. 2023. Note: The chart shows U.S. M2 Money Supply – a measure for the amount of currency in circulation – and U.S. Consumer Price Inflation (CPI). Any opinions or forecasts represent an assessment of the market environment at a specific time and is not a guarantee of future results. This information should not be relied upon by the reader as research, investment advice or a recommendation.

Active opportunities as cheap-money era ends

Major central banks flooded economies with cash during the COVID-19 crisis to offset the impact of government lockdowns. Now that excess money supply is being rapidly withdrawn in a bid to combat inflation, and money supply in the U.S. is contracting for the first time since the 1930s. See the chart above. This signals the end of the cheap-money era that has been largely in place in developed economies since the end of the global financial crisis – a decade where financial assets across classes inflated. We are now in a new economic regime of higher rates and inflation, and this means that investors will have to look harder to secure desired returns, in our view.

For equity markets, we believe this means fewer returns from “beta” – or overall market gains – and a greater share of performance through the pursuit of “alpha” – or above-market returns. To find this alpha, we believe in an active approach that focuses on profit margins and valuations, two fundamental metrics that faded in importance during the era of cheap money.

Profit margins matter: Margins may come under pressure as growth slows and overall inflation cools (and so prices of products dip) while wage inflation (and so company costs) remains sticky. We are already starting to see this come through in company earnings, with management teams commenting on cost pressures and inventory reductions in the face of weaker demand. We look for companies with the ability to control costs – including by having a limited exposure to labour costs – and be firm on pricing even if economic growth slows.

Valuations are vital: Expensive parts of the stock market fell the most in 2022, and remain vulnerable to higher rates, in our view – especially after these areas surged at the start of 2023. We are cautious here and see risks that central banks may surprise markets with their determination to bring inflation down to target levels. On the other hand, the best performing sectors of 2022 – energy and financials – remain cheap versus the past 20 years. We expect these sectors to perform well again in 2023, and companies within the energy sector are now available at even cheaper valuations after a pull back at the start of the year. The healthcare sector also trades at a discount to the rest of the market, and we believe a recent dip in valuations provides opportunities to find quality, defensive companies at attractive prices. Overall, we seek companies that can achieve earnings upgrades, yet remain cheap on a historical basis or versus peers in the market.

The figures shown relate to past performance. Past performance is not a reliable indicator of current or future results.

Lock in for the long term

A focus on margins and valuations unlocks several attractive opportunities in the equity market, in our view – and we will be writing more in the coming months about where these opportunities may lie.

We aim to hold on to our favoured positions for the long term – to capture the benefit of compounded earnings – and use periods of market volatility to add to them. If growth falls more than expected in 2023 – or if wages and inflation are more stubborn than the markets expect – then equity markets may lurch downwards. This could present attractive entry points for long-term investors.

An analysis of global stock performance shows the benefit of staying invested. Over the past 20 years, an investment in global stocks, as represented by the MSCI World Index, would have notched an annualized return of 6%. But if the best 75 days (just 1% of trading sessions) had been missed, the return on that investment would be negative.

By adopting a selective approach – using deep research and fundamental analysis to identify companies with the ability to achieve earnings upgrades – we believe this benefit of time in the market can be turbocharged.

The figures shown relate to past performance. Past performance is not a reliable indicator of current or future results.

Index performance returns do not reflect any management fees, transaction costs or expenses. Indices are unmanaged and one cannot invest directly in an index.

Nigel Bolton
Co-Chief Investment Officer, BlackRock Fundamental Equities
Helen Jewell
Deputy Chief Investment Officer, BlackRock Fundamental Equities

Source: BlackRock, as at 31 January 2023.

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.

The value of equities and equity-related securities can be affected by daily stock market movements. Other influential factors include political, economic news, company earnings and significant corporate events.

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