Second Quarter 2023 Review & Outlook

“People who exit the stock market to avoid a decline are odds-on favorites to miss the next rally.” – Peter Lynch


When 2023 started the big question was when a recession would start and how negatively the stock market would react.  The Federal Reserve had been raising interest rates since March 2022, which significantly raised the cost of capital for businesses and individuals.  The economy was slowing, and corporate profits had stalled.  But despite the headwinds faced by the stock market including (1) a possible recession, (2) a very hawkish sounding Federal Reserve, (3) narrow leadership of a group of stocks leading the market, and (4) a steeply inverted yield curve, the equity markets have continued to climb a wall of worry during the first half of the year.

The S&P 500 increased 16.9% on a total return basis for the first six months of the year, closing at 4,450.  The index was powered by big technology companies, many of which have bright future prospects tied to the development and utilization of artificial intelligence, or “AI.”  Many of these companies are also in the NASDAQ Composite Index, which posted a 32% advance through the first six months of the year.  This was the strongest showing for the NASDAQ for the first six months of a year since 1983.  The Dow Jones Industrial Average, which held up much better last year than the S&P 500 or NASDAQ, has been the laggard in 2023 registering only a 4.9% advance during the first six months.

As the performance of the main indexes suggests, the three strongest sectors this year have been Information Technology, Communication Services and Consumer Discretionary.  Conversely, the weakest sectors, which were all actually negative for the first six months, were Utilities, Energy, and Health Care.  The best performing sectors thus far in 2023 were the worst performers in 2022, and vice versa.

A couple of factors helped the economy and stock market weather the predicted storm better than most prognosticators forecasted.  Energy prices dropped instead of continuing to rise, which helped slow the rate of inflation substantially.  Meanwhile, the jobs market proved a lot less susceptible to a slowdown from rising interest rates.  Companies and individuals locked in lower rates on loans and mortgages during the pandemic, thus mitigating the negative effects of rising rates and therefore allowing for stronger consumer spending.  While the inflation slowdown has not yet reached the Federal Reserve’s stated goal of 2%, it slowed enough for the Fed to have paused on rate hikes at their June meeting.  That was the first pause since the hiking cycle started in March 2022. 

The yield on the 10-year U.S. Treasury Note, which influences everything from mortgage rates to student loans, finished the second quarter at 3.81% which is essentially unchanged since the end of the year when the yield was 3.82%.  Many individuals have decided not to move from their existing home due to their extremely low mortgage interest rate compared to what they would have to pay in the current market.  It is not uncommon now to see the 30-year fixed rate for mortgages over 7%.  This is the main reason why the average monthly annualized sales of existing homes has hit the lowest level since August of 2012.  Overall, the supply of homes for sale continues to be an issue as well as inventories of homes listed for sale.  According to the National Association of Realtors the housing market hit its lowest level of monthly sales for the month of May since 1999.


Many investors are surprised to learn that the stock market entered a new bull market phase on June 8th when the S&P 500 posted an increase of more than 20% from its previous low hit on October 12th, 2022.  The 20% increase off of a prior low is the traditional definition of a bull market.  Conversely, a 20% decline from a high is the traditional definition of a bear market.  The bear market of 2022 experienced a peak to trough decline of 25.4%, lasting 282 days, from January 3rd, 2022 until October 12th, 2022.  According to Bespoke Investment Group, since 1928, the 27 bear market periods experienced by the S&P 500 have lasted an average of 286 days, while the average bull market has lasted 1,011 days.  If the new bull market were to last as long as the average bull market, it would extend until July of 2025.  This is a great example why market timing is a futile effort.  Peter Lynch once said, “People spend all this time trying to figure out ‘What time of the year should I make an investment? When should I invest?’ And it’s such a waste of time. It’s so futile.”

According to CFRA, history suggests that the second half of the year could be positive just like the first half of the year.  Based on their research, whenever the return in the first half of the year exceeds 10%, the S&P 500 posted an average second half return of 8% and gained in price 82% of the time.  Additionally, over the subsequent 12 months, the S&P 500 averaged a gain of 12.15% with positive returns 77% of the time.  Sam Stovall, CFRA Chief Investment Strategist, recently noted the following positive commentary on the market for the rest of this year and over the next twelve months:

Even though there remains the possibility of elevated volatility in the third quarter, should the Fed hike rates in July and continue to pressure GDP growth and employment trends, CFRA sees investors looking beyond the near-term weakness and focusing on projected improvements in GDP growth and earnings increases in 2024.  As a result we see share prices closing 2023 (for the S&P 500) at 4,575 and reaching 4,820 by this time next year.

It now seems unlikely that we will enter a recession this year as many of the prognosticators had predicted earlier in the year.  There are still many employers looking for new employees while consumers continue to spend discretionary income on travel and leisure experiences.  Airline travel continues to be strong while hotel room rates are up over 10% from pre-pandemic levels.  The banking sector appears to be stabilizing as well from the stresses earlier this year. 

Goldman Sachs is another firm that recently turned more bullish on the future prospects for the market.  They recently boosted their year-end price target on the S&P 500 to 4,500 from 4,000 based on the declining odds of a recession and anticipated improving corporate earnings.  Their economists currently project only a 25% chance of a recession over the next 12 months versus 65% for the median forecaster.  David Kostin, chief U.S. equity strategist for Goldman Sachs, recently noted:

Following the first quarter earnings season, we continue to believe that the worst of the negative revision cycle is behind us, and the trajectory of analyst earnings estimates has indeed improved in recent weeks.

Many other economists are becoming more positive on the economy as well.  The consensus forecast of economists in the second quarter, which was negative in early April, is now forecasting a 1% growth rate for the economy.  The Atlanta Fed’s GDPNow number is trending more positive at close to 2%.  Commerce Department data released during the last week of June showed the gross domestic product increased at a 2% annualized pace in the first quarter of this year which was significantly faster than the previous estimate of 1.3%.  In addition, the widely followed University of Michigan consumer sentiment survey is up 8% in June which is its highest level in four months as inflation has eased somewhat.

Inflation remains at high levels but continues to trend lower.  At the end of June, the Bureau of Economic Analysis released its latest report on personal consumption expenditures.  The May PCE Index, the Federal Reserves preferred measurement of inflation, was up 0.1% month over month, and 3.8% for the past year.  Both of these figures declined from the previous month when the month-over-month increase was 0.4% and 4.3% over the past year.  Goldman Sachs expects these numbers to continue to trend lower with used car prices declining, apartment rent prices declining, and the labor market softening.  Several economists expect the June CPI report that will be released in mid-July to show the year-over-year increase to be about 3% which would be a welcome relief for the markets.

As we go through the second half of 2023 the continued focus for the stock market will be the future actions of the Federal Reserve and the economic and corporate earnings outlook for 2024.  One very important aspect is that according to FactSet, earnings have started to stabilize with earnings estimates up 1% over the last month.  Analysts are now projecting earnings per share to grow at a very healthy 12% next year to $245 for the S&P 500, which is very positive for the markets.  

We continue to remain positive for the future prospects for investors going forward.  As we have mentioned previously, since 1928, the market has been positive 64 out of 95 years, or 67% of the time.  Investors with long-term horizons have been rewarded handsomely for remaining in the market during volatile periods of time like we have witnessed over the last several years.  The solid and mostly unexpected positive results during the first half of 2023 show once again why it is so hard for investors to try to time the market.

Please let us know if you have any questions or if you would like to discuss your financial situation in detail.  Thank you for being clients of our firm.


Marietta Wealth Management, LLC

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