News & Our Thinking

Ward Brown reflects on an exciting first half of 2023 in the stock market and looks ahead to year-end expectations. He explores the extraordinary rally in stocks that surprised Wall Street strategists, resiliency from consumer and corporate earnings, and a persistent demand for artificial intelligence. Will the last half of the year continue this momentum? Stay tuned.

Transcript

Hello, I’m Ward Brown, sitting outside the beautiful new St. Louis City soccer stadium. You know, soccer is the only major sport that operates purely in halves. First half and a second half. We thought it was appropriate as we sit at the halfway point of a much better-than-expected 2023. Let’s take a look at what drove the gains in the first half and what we’re thinking as we work into the back half of the year

Through the first six months of the year, there has been an extraordinary rally in stocks, particularly for mega-cap technology stocks and those expected to benefit from AI or artificial intelligence. The element of positive surprise has played a significant role. Coming into 2023, most Wall Street strategists were unusually cautious, the majority expecting a recession and down year for stocks. That is a rarity.

Instead, the labor market, the consumer, corporate earnings, and the economy have been far more resilient than expected. Inflation, while still elevated, has been trending in the right direction. Supply chains have improved. The housing market has been remarkably solid in the face of higher mortgage rates. The banking crisis has, at least for now, retreated from view almost as fast as it arrived. Finally, the debt ceiling issue was resolved.

Nonetheless, issues, including fears of an oncoming recession and the onslaught of artificial intelligence-related demand, drove investors to the perceived relative safety of large-cap technology stocks in the second quarter, just as it did in the first quarter. Technology’s significant weighting in the S&P 500 Index helped lift the market, but the median stock lagged well behind.

Towards the end of the second quarter, there was a slew of better economic data, including May Retail Sales, May Housing Starts, and positive revisions to first-quarter GDP. That reignited hopes for the “soft landing scenario,” and stock market breadth began to widen. A lot more companies participated in the stock market gains in June. We ended on a positive note.

It would appear the stock market is growing more comfortable with higher interest rates and that the end of the rate hike cycle is getting closer. The prospect of additional bank failures is growing more remote. Bank lending is tightening, but so far, a credit crunch has been avoided. Inflation is high but a lot better than it was a year ago. Consumers are still spending. The job market is showing some signs of slackening but is still historically tight by almost any measure.

The second half of 2023 will largely depend on whether that “soft landing” comes to fruition or if the economy, especially the labor market, finally succumbs to some of the slow-down pressure. There are expectations for significantly better corporate earnings in the back half of the year, especially the fourth quarter. Time will tell. It will depend on an economic recovery gaining steam and the resilience shown in the first half to continue and to broaden out. A gently slowing economy and softer labor market that allows the Federal Reserve to pump the brakes likely works, too.

The potential hiccups out there right now include things like inflation getting more stubborn, trouble in commercial real estate or corporate balance sheets from higher interest rates, or the tech-oriented trade war between the US and China getting worse, amongst other geopolitical threats. In addition, the forward price-to-earnings or PE ratio of the S&P 500 is about 20 times right now. It’s a few turns higher than the 10-year median of 18 times. In other words, the market isn’t cheap. Fortunately, there is historical precedent for six months, like we just had to be followed by additional forward gains. It wouldn’t be surprising if that were something more muted than in the first half, especially after the pronounced returns in June. But we remain cautiously optimistic.

Thanks for watching

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