A while ago, I wrote a note that claimed that changes in bond yields and inflation are much more important than changes in earnings for equity market returns – at least over shorter time frames like 12 months. This caused some cognitive dissonance because strategists, analysts and professional investors are mostly concerned with forecasting earnings and then deriving fair valuations for stocks from these forecasts. Throughout 2023, we will test the dominance of interest rates vs. earnings to a much more pronounced degree than usual.
The other key here is why are bonds declining. Yields are already low, and inflation expectations are already skewed to optimism, I think the challenge will be if longer term yields drift higher as market expectations reset.
In this scenario you have higher yields and lower EPS, although potentially more reason to pivot or cut, but in the face of a much worse economic outlook.
Here is why I think stock prices will rise. Where else are people going to put their money? Even half-smart money doesn't flow into bank accounts these days, which leaves real estate and stocks. Real estate at a time of high inflation and high interest rates? I don't think so.
To what extent has potential monetary easing not already been discounted?
The other key here is why are bonds declining. Yields are already low, and inflation expectations are already skewed to optimism, I think the challenge will be if longer term yields drift higher as market expectations reset.
In this scenario you have higher yields and lower EPS, although potentially more reason to pivot or cut, but in the face of a much worse economic outlook.
Here is why I think stock prices will rise. Where else are people going to put their money? Even half-smart money doesn't flow into bank accounts these days, which leaves real estate and stocks. Real estate at a time of high inflation and high interest rates? I don't think so.