We look at the pressures weighing on the market today, and why we think the S&P 500 could deliver positive full-year returns, once all is said and done.
February 23, 2023
Vice President, Portfolio AnalystPortfolio Advisory Group – U.S.
Following a strong run since last autumn, the U.S. equity market has been wobbly. Uncertainties that had previously receded have come back to the fore, generating volatility and downside in major U.S. indexes. While the S&P 500 shot up almost 17 percent from the October 2022 low through early February, it has pulled back 4.5 percent since then. As of Wednesday’s close, the index is 16.8 percent below the all-time high reached in early 2022.
Line chart showing the S&P 500 peaked on January 3, 2022 at almost 4,800. While it had fits and starts in 2022, it ultimately fell to 3,577 in mid-October. After that it rallied through early February to 4,180. But since then it has pulled back to just under 4,000.
Source – RBC Wealth Management, Bloomberg; daily data through 2/22/23
Market participants are once again mulling over the possibility that:
Line chart showing the S&P 500 P/E ratio since 2003. It began around 16.0x the forward consensus estimate and drifted up to almost 18.0x by the end of that year. It later drifted lower, until bottoming at around 10.5x in 2011. It moved higher until 2017 to around 18.0x, and then pulled back in 2019 to 14.6x. From then it spiked until late 2020 when it peaked at over 22.0x. After that it fell to 15.3x by September 2022. But it has risen recently to 17.9x. Since 2003, the average level was 15.7x; +1 standard deviation was 18.3x; -1 standard deviation was 13.0x.
Source – RBC Wealth Management, Bloomberg; quarterly data except for the final data point that is from 2/22/23. “STD” stands for “standard deviation.”
It’s not unusual for a number of uncertainties to linger after big selloffs like the one that occurred in 2022, and for issues that had previously caused volatility to create angst once again. This typically happens when equity markets are in transition. As the major indexes work their way through bear market declines and get closer to beginning a sustainable bull phase, there are usually a number of fits and starts. Given the lingering headwinds, investors should expect more volatility this year—this would be normal market behaviour.
Even if volatility persists in the coming weeks and months, we continue to see reasons why the S&P 500 can deliver positive full-year returns, once all is said and done.
We think these positive factors, balanced by the lingering headwinds, argue for Market Weight exposure to U.S. equities, with an eye toward becoming more aggressive with sector and industry positioning or more constructive overall should the market pull back further.
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