With 2022 now in the books, the S&P 500 has officially posted its worst year since 2008. Pressured by high inflation and sharply rising interest rates, the S&P 500 fell nearly 20% in 2022. Growth stocks, burdened by higher rates, fared the worst. The growth-oriented NASDAQ 100 fell more than 33%. By comparison, value stocks performed much better — mainly due to such companies’ generous dividend payouts. The S&P 500 Value Index fell slightly more than 7% on the year. Bonds also offered little protection in 2022, with long-duration treasury bonds falling more than 32%.

As we move forward into 2023, markets remain laser-focused on the path of inflation. Though inflation peaked in the final months of 2022, moderation must continue. Much of the data points toward a significant slowdown in price increases in the first part of the year. However, this will likely depend on China as it moves away from its yearslong zero-Covid policy. Further supply chain disruptions and pent-up demand could challenge inflation’s downward trajectory. 

So far, U.S. consumers have stayed resilient in the face of an unprecedented pace of Fed Funds hikes. Despite 425 basis points of increases in 10 months, the unemployment rate remains near record lows. Nevertheless, the full impact of rate increases has yet to be felt, considering the delayed effects of monetary policy. Additionally, the Fed has committed to moving policy into restrictive territory. While recession risks are elevated, a strong labor market and pandemic savings offer a reason for optimism. Assuming inflation continues to moderate, consumer durability is a path to a softish landing. 

We expect markets will be watching corporate earnings closely for clues about the health of the economy. Earnings are expected to increase between 5% and 6% in 2023, but any downward adjustment to these estimates poses a risk to stocks. Even with a softish landing, estimates are likely to come down some from today. Therefore, we continue to lean toward stable stocks with strong balance sheets, robust cash flows, and sustainable dividend practices. 

Preston May, CBE®
Research Analyst

This report was prepared by Donaldson Capital Management, LLC, a federally registered investment adviser under the Investment Advisers Act of 1940. Registration as an investment adviser does not imply a certain level of skill or training. The oral and written communications of an adviser provide you with information about which you determine to hire or retain an adviser. Information in these materials are from sources Donaldson Capital Management, LLC deems reliable, however we do not attest to their accuracy.

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S&P 500: Standard & Poor’s (S&P) 500 Index. The S&P 500 Index is an unmanaged, capitalization-weighted index designed to measure the performance of the broad U.S. economy through changes in the aggregate market value of 500 stocks representing all major industries.