Based on the early market action of 2023, it looks like the new year’s resolution of investors like this: Keep Big Tech in the penalty box, place bets on the performance of foreign stocks, while party bonds of all kinds to get a healthy yield and keep some hope that the soft economic landing is difficult can still be understood. No one needs a reminder that year-end resolutions often dissolve amid changing circumstances. Remember that at the beginning of last year, the popular bet was for a smooth and painless rotation from expensive growth stocks to financials and cyclicals. Not long ago: The S&P financial sector beat utilities by seven percentage points in just the first week of 2022. From that point through the rest of the year, utilities outpaced financials by a yawning 17 percentage points. Still, the market has announced some clear options at the beginning, some of which only take place from 2022. These include the continued unwinding of the large value premium and the very optimistic investor sentiment in the Nasdaq giant. Tech unwind continues since November 2021, the deflation of this tech favorite enters a new phase with a topping pattern in Apple shares and a rapid liquidation in Tesla, which is worth about three-quarters of the 1,800% surge of the favorite shares in the market. two years until the final peak in 2021. It is common practice to act in response to higher interest rates, which reduce the present value of distant cash flows. But rates are always only part of the story both in the way up and down. In fact, since the 10-year Treasury yield peaked on Oct. 24, the Nasdaq 100 is down nearly 4% while the equally weighted S&P 500 has gained 8%. Forecasts of sinking profits colliding with still-rich valuations tell a more relevant story. As of mid-2022, consensus 2023 earnings forecasts for Amazon have fallen 30%. For Alphabet, it was down almost 20%. These companies once experienced reliable growth when growth was rare, they hired with confidence that the good times would last and analysts extrapolated the pandemic-era growth spurt. One could argue that a large part of today’s technological reckoning has already taken place. The forward price/earnings ratio on the Nasdaq 100 has actually fallen from 31 a year ago to less than 21 today. Some of the stocks that lead the way to lower prices can be argued to be washed up and cheap. Some investors are clearly coming into the year if, for example, Meta Platforms and PayPal are included in the category of “de-risked” growth stocks, each up 8% last week. But the Nasdaq 100’s premium to the overall S&P 500 remains 25% – higher than at any time in the decade before the Covid pandemic. And the history of previous tech busts, such as after the peak of the 2000 market, suggest that this group can have a long time in the desert even after they stop going down, lagging the tape width for years. Foreign shares through the US? And the broader band, as measured by the equally weighted S&P 500, continues to outperform the top headline index. This egalitarian basket, which can be purchased through the Invesco S&P 500 Equal Weight ETF (RSP), is up 16% from the fall, down less than 12% from its record high and has recently entered a new cycle high against the traditional S. & P 500. The poor positioning and performance of large growth stocks is also a factor in the emerging options for overseas markets. The dominance of American tech stocks has been a big part of the performance of US indices around the world over the past 15 years. Now there are hints of a potential reversal. The non-US market as a group – see the iShares ACWI ex-US ETF (ACWX) – rose more than 4% last week against 1.5% for the S&P 500. The dollar is near a seven-month low. China is reopening and European markets are leaning towards value sectors and exporters. Bank of America global strategist Michael Hartnett issued a call to “Buy the world” against the US for these reasons and more. Citi global strategists on Friday downgraded US equities to underweight, saying European stocks, in particular, were undervalued compared to American stocks. Such calls for an international return have been made several times over the past decade, to no avail, although it is now overdue. The very high US profit forecast is a shared view, and quite reasonable, although it is almost certain that the market has not forgotten about it. Low expectations Morgan Stanley shows this chart plotting the S&P 500 consensus forward earnings tally against the index’s forward P/E is proof that profits are about to hit. Perhaps, although one can also read this as the market in general anticipating a turn in the style of earnings, and possibly a good part of last year’s compression in value shows the risk that profits have more room to fall. It is also worth noting that Wall Street’s current projection of 4% S&P 500 growth is, somewhat surprisingly, the lowest forecast next year in at least 35 years, according to Deutsche Bank. And that includes a number of years when earnings ended up being negative – and in some of those years, stocks didn’t go down (1998, 2012, 2015, 2020). Put this to the evidence file that, whatever the problems of this market, optimistic expectations are not among them. Bears have outperformed bulls for 40 consecutive weeks in the AAII retail-investor poll for the first time, active managers in the NAAIM position survey showed a 39% equity exposure in history last week and the last week of 2022 saw a large flow of equities. fund. None of this means that the market has absorbed all that the tough macro environment has to offer. Shares celebrate the evidence of reduced wage growth and prices of the service sector on Monday, after three weeks of tightly coiled sideways trading right at the down-20% level of 3800 for the S & P 500. It remains a downtrend, until proven otherwise and the Federal Reserve can certainly once again push investors back in the heel to prematurely celebrate the last potential for tightening movements. But strong consumer incomes and low debt service obligations among households and firms are a buffer, so a soft bankruptcy scenario is still alive. Can housing and manufacturing pull back a bit to slow the economy, while activity generally muddles? No one knows, but no one can seize the opportunity. Henry McVey, head of global macro at KKR & Co., wrote on Friday, “We are in a fundamental process where supply, sentiment and pricing (especially on the credit side) are looking quite attractive, but unrealistic margin assumptions and the US dollar strong. meaning this process will take longer than normal to play.” The attractiveness of credit is being noticed, with large flows into bond funds absorbing most of the new corporate issuances last week, a healthy sign that the capital market’s circulation system is working well. The higher yield, with the investment grade index offering 5%, is said to provide tough competition for stocks. Shallow, yes. But the presence of safe yield – or, in fixed income terms, “carry” – in a portfolio can also prevent equity volatility and in fact allow investors to better bear the risk that stocks carry. Recession predictions, based on a long history of data relationships involving the yield curve and Leading Economic Indicators, also cannot be disproved, leaving the tape caught between the Fed saying it is difficult and wary of the economy to give way. If nothing else, the starting point for 2023 is better for investors than last year. Going back, one buys the S & P 500 at 21 times expected earnings, can take no more than 1.8% in yield from 10-year Treasuries and the Fed has all been tightening ahead of it. Currently, the S&P is below 17 and its 20-year average, with 10-year yields doubling and the Fed almost done raising rates. It does not mean that things are cheap and yielding forward, but it should be remembered that when asset prices and values fall, the risk will be taken out of the market and the potential return in the future will be restored.