Opportunities on the Horizon: Investing Through a Slowing Economy

thematic updates | WEALTH OUTLOOK 2023 | MID-YEAR EDITION | 29 A turning point just ahead of us Ultimately, the highly cyclical US labor market and the Fed’s mandate to support maximum employment will likely undermine the dollar in the coming years. By the end of 2024, we expect the Fed to unwind half its 2022-2023 tightening steps while other central banks remain steady ( FIGURE 2 and 3 ). The larger question for US exchange rates is “what’s in the price?” While we are oversimplifying slightly, the near record high US dollar means that there is an embedded expectation that the US will have stronger real economic growth and less inflation than other countries in the years ahead. The Fed’s aggressive interest rate hikes attracted inflows from international investors seeking yield. Those inflows will likely slow during the upcoming Fed easing cycle, weakening the dollar. The dollar’s decade-long rise helped drive US equities toward a record 62% share of the world’s equity market capitalization last year ( FIGURE 1 ) . This hasn’t come without a cost elsewhere. Non-US equities currently hug a record low valuation compared to the US, nearly 40% below current-year earnings per share (EPS) estimates, and nearly 30% below a 10-year average of actual EPS ( FIGURE 4 ) . While US firms may outgrow global peers based on their industry and individual merits, such a premium valuation requires continued outperformance. We believe that some foreign firms could potentially make competitive headway against US companies and that returns from non-US equities may increase if foreign currencies appreciate against the dollar. FIGURE 3 : Rapid Rate Hikes Expected to Ease -5 -4 -3 -2 -1 0 1 2 3 4 5 -6 -4 -2 0 2 4 6 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20 '22 '24 Percent Difference Percent Difference Recession Fed Funds Rate 12m diff (Left) Fed Funds (Market Implied estimates) US Unemployment Rate 12m diff (inverted, Right) Source: Haver Analytics and Bloomberg as of May 2, 2023. The gray shaded areas are US recessions. All forecasts are expressions of opinion, are subject to change without notice and are not intended to be a guarantee of future events. Past performance is no guarantee of future results. Real results may vary. FIGURE 4 : Non-US Equities at a Discount to US Equities -0.5 0 0.5 1 1.5 '35 '45 '55 '65 '75 '85 '95 '05 '15 World Ex -US Premium/Discount to US CAPE World Ex-US Premium/Discount to US (CAPE) Source: Factset as of April 21, 2023. 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. The CAPE ratio is a valuationmeasure that uses real (EPS) over a 10-year period to smooth out fluctuations in corporate profits that occur over different periods of a business cycle.