Positioning for Late–Cycle Dynamics
By Saghir A. Aslam
Rawalpindi, Pakistan

 

(The following information is provided solely to educate the Muslim community about investing and financial planning. It is hoped that the Ummah will benefit from this effort through greater financial empowerment, enabling the community to live in security and dignity and fulfill their religious and moral obligations towards charitable activities).

Earnings likely to weaken through 2023

In the US, we expect 2022 revenue growth to be challenged as the economy slows. Also, we see operating margins falling from record levels while interest, labor, and input expenses climb. We forecast positive but slowing earnings growth in 2022 and an earnings contraction in 2023 due to the recession we expect in late-2022 and early-2023.

Our forecasts for higher interest rates and slower growth likely will continue to place some downward pressure on price/earnings (P/E) multiples in the near term. However, later in 2023 we expect the beginning of an economic recovery that markets may project into 2024. In that case, valuations should stabilize and rise, taking equity prices higher through the end of 2023.

Main Points

• We expect earnings growth to slow in 2022 and shrink in 2023. However, we believe valuations will rebound in 2023 to lift equity markets by year-end.
• As the cycle matures, our preferences have moved away from cyclicals, and instead, we favor higher-quality asset classes and sectors.

What it may mean for investors?

• We believe investors should continue to lean into high-quality US large-cap and mid-cap equities and reduce cyclicality as the economy slows.
• We have always emphasized investing in companies with long term track record.

(Saghir A. Aslam only explains strategies and formulas that he has been using. He is merely providing information, and NO ADVICE is given. Mr Aslam does not endorse or recommend any broker, brokerage firm, or any investment at all, nor does he suggest that anyone will earn a profit when or if they purchase stocks, bonds or any other investments. All stocks or investment vehicles mentioned are for illustrative purposes only. Mr Aslam is not an attorney, accountant, real estate broker, stockbroker, investment advisor, or certified financial planner. Mr Aslam does not have anything for sale.)

This article has been written in collaboration with Walt Hommerding senior vice president investment of Wells Fargo .