Taking Stock: Q4 2022 Equity Market Outlook

Balancing acts. As the Fed walks the line between curbing inflation and averting recession, anxious investors are seeking to balance the two risks. Amid the uncertainty, we believe stock selection matters more. As Q4 begins, we see:

  • Heightened volatility as inflation seeks a landing spot
  • A continued case for value as the economic cycle evolves
  • Attractive opportunity in select growth stocks

Market overview and outlook

Inflation peaks and market rallies often go hand in hand. Since 1927, the average S&P 500 return in the 12 months following an inflation crest was 11.5%, as shown in the chart below. June’s Consumer Price Index (CPI) reading of 9.1% may well have marked the high for this cycle, and we saw a relief rally in equities in anticipation of July’s lower figure. But a peak in inflation does not mean a return to the low-rate environment we saw post the Global Financial Crisis (GFC).

The question now is how fast can inflation fall and where does it come to rest? We don’t see a quick retrenchment or a return to the once familiar 2%, keeping the Fed in hiking mode. This implies more volatility and a need for caution and balance in equity allocations.