Opportunities on the Horizon: Investing Through a Slowing Economy

Overview | WEALTH OUTLOOK 2023 | MID-YEAR EDITION | 18 opportunistically at artificial intelligence and renewable energy. We’re also focused on future increases in our allocation to global small- and mid-caps over large-caps as large-caps are already trading at 25 times trailing earnings per share (EPS). By contrast, profitable US small- and medium-cap (SMID) shares are trading near a 30% discount to large-cap shares on 2023 estimates. Similar or even larger valuation discounts can be found in international equity markets. The valuation gap is further compounded by the strong US dollar. This should help non-US markets generate enhanced returns in the decade to come. We’ve already shifted portfolios to address the opportunity. In the year to date, our position in large-cap US equities has outperformed an underweight in small caps by more than 900 basis points. We are not yet ready to relinquish this component of our defensive posture ( FIGURE 13 ) . However, as “defensive” shares have become consensus overweights - in some cases having seen substantial upward revaluation - returns are becoming more compelling for the shares left behind, even if an investor is “early.” Historical data shows that only twice in the past century has a bear market in US shares taken longer than two calendar years to bottom. While we are not yet in a convincing bull market cycle, we expect to be further along in our investment journey by the time of our Wealth Outlook 2024. FIGURE 13 : Small- and Mid-Cap Outperformance Tends to be Highly Concentrated in Early Bull Markets 22.1% -3.1% -9.9% -3.9% -0.2% -15 -10 -5 0 5 10 15 20 25% 1st year of Bull Market 2nd year of Bull Market Rest of Bull Market Bear Market All Periods Excess Small-Cap Performance vs. Large-Caps Source: Haver Analytics as of May 12, 2023. Small caps proxied with Russell 2000 and large caps proxied with S&P 500. All forecasts are expressions of opinion and are subject to change without notice and are not intended to be a guarantee of future events. Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance. Past performance is no guarantee of future results. Real results may vary.