Taking Stock: Q3 2023 Equity Market Outlook

Key takeaways

An ounce of optimism, a pound of prudence. It’s still a good time to be measured about taking risks in equities, but we believe the longer-term horizon holds particular promise for active stock pickers. As Q3 begins, we see:

  • Investor caution keeping cash on the sidelines.
  • Greater dispersion in earnings, valuations, and returns.
  • Opportunity to build and deploy shopping lists.

Equity market overview and Outlook

Stocks arguably defied expectations in the first half of the year, with the S&P 500 notching double-digit returns even as inflation remained elevated and the Fed continued its fastest rate-hiking campaign since the 1980s.

The big picture masks some nuances: Technology shares, after cratering in 2022, have carried index returns. And comparing the index’s market-weighted (15%) and equal-weighted (5%) returns illustrates just how much the mega-cap stocks ― primarily tech-related stocks across IT, telecom services, and consumer discretionary ― have driven year-to-date performance. See the chart below. We remain selective in taking risks as we prepare our shopping lists for the cycle’s next leg, and we believe stock selection will be rewarded as investors prioritize company fundamentals and market breadth widens beyond the current leaders.

A tale of two markets