Following the substantial pressures of last year, global capital markets open a new chapter in 2023 with a mix of nervous uncertainties and exciting possibilities. Here, 10 experts from FactSet share their views on what to watch across U.S. earnings, artificial intelligence, European thematic investments and earnings, wealth management, mergers and acquisitions, fixed income, ETFs, ESG, digital assets, and energy markets.
U.S. Earnings: Predictions for a Strong Second Half
John Butters, VP, Senior Earnings Analyst
Despite concerns about a possible recession, analysts still expect the S&P 500 to report single-digit earnings growth in 2023. The estimated year-over-year earnings growth rate for 2023 is 4.8%, below the trailing 10-year average annual earnings growth rate of 8.5% from 2012 – 2021. It is also below estimates of 9.6% on June 30, 2022, and 8.2% on September 30, 2022, as analysts have lowered 2023 earnings estimates in aggregate over the past few months.
Analysts are expecting all of the earnings growth in the second half of 2023.
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Q1: 0.0%
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Q2: -0.3%
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Q3: 5.6%
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Q4: 10.6%
Eight of the 11 sectors are predicted to report year-over-year growth in earnings, led by the Consumer Discretionary, Industrials, Financials, and Communication Services sectors. On the other hand, three sectors are projected to report a year-over-year decline in earnings, led by the Energy, Materials, and Health Care sectors.
AI in Finance: Surfacing Insights and Streamlining Operations
Lucy Tancredi, SVP, Cognitive Computing
Given all the excitement around ChatGPT—the recent major advancement in conversational AI technology from OpenAI—we decided to ask for its forecast of AI use in the finance industry in 2023. Here are some of its predictions:
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Artificial Intelligence (AI), Machine Learning (ML), and Natural Language Processing (NLP) will be used to provide more accurate and comprehensive financial analysis of companies, enabling investment firms and banks to better identify and capitalize on investment opportunities
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Investment firms will use AI-driven models to predict market movements, make decisions about when to enter and exit the market, and what assets to buy and sell
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AI will drive automated compliance monitoring and risk management, detecting suspicious activity and flagging potential regulatory violations
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Investment firms will use AI to automate portfolio management, taking into account factors such as risk tolerance, investment goals, and market conditions
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Firms will use ML to create customer segmentation models that can be used to tailor customer experience, marketing, and product offerings to specific customer needs
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AI-powered chatbots and virtual assistants will provide customers with real-time access to financial data and insights, as well as improve customer service and engagement
European Thematic Investment Capabilities Poised for Expansion
Philipp Zerhusen, VP, Director, Digital Wealth Solutions
Even though the Ukraine war has presented a setback for thematic and impact investments, I am certain the current crisis and an eventual market rebound will ultimately become a catalyst and booster for thematic investments.
Every investment manager and asset owner I spoke to over the past year confirmed they are set on expanding their thematic investment capabilities, most notably ESG and impact investing. With modern and efficient tools—even micro-strategies or investment strategies adjusted to the individual investor—taking preferences, themes, or personal belief systems into consideration will become possible.
If you are interested in learning how this works in a specific scenario, watch our webcast replay. It features a discussion with two active thematic ETF executives who have enhanced their investment process.
European Earnings: Negative Growth on the Horizon for 2023
Sebastian Segerstrom, VP, Research Solutions, Director of EMEA Sales
Just before the new year, we looked at what the STOXX Europe 600 is poised to report for 2022. Now we take a look at what analysts think for 2023.
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On aggregate, earnings are expected to decline by -3.6% y/y, while sales are expected to decline by 1%
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Four of the 11 sectors are poised to report double-digit negative earnings growth for 2023: Basic Materials (-32.7%), Real Estate (-18.4%), Energy (-16%), and Industrials (-10.2%)
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Double-digit positive earnings growth is expected for Consumer Discretionary (18.5%), Technology (14.9%), and Financials (11.5%)
In light of the Energy sector performance in 2022, the expectation of the sector cooling off should come as no surprise—though it’s expected to continue reporting strong earnings throughout 2023 in actual figures. With six out of the 11 sectors estimated to report positive earnings growth and five looking to report negative earnings growth, analysts are estimating a real mixed bag ahead of actual results throughout 2023.
Wealth Management: An Island of Strength Amid an Uncertain Financial Environment
Sean Ryan, VP/Associate Director
Wealth Management looks set to remain an island of relative strength in a financial sector under increasing pressure. While rising rates may continue to weigh on AUM, and thus revenues, fund flows stand a good chance of remaining positive. Even as the deteriorating environment forces financial firms to slash bonus pools and announce layoffs, those same firms have articulated plans to continue investing in their wealth management operations, adding advisors and building out digital delivery channels and broader product suites.
Direct indexing (and SMAs generally) should continue to see strong growth as the benefits of tax loss harvesting and ESG customization drive broader adoption. The volume and valuations of RIA acquisitions will likely remain at healthy levels, though well off their recent highs.
We would watch for potential weakness in the wealth tech area, as VC funding has dropped off sharply there as elsewhere, although this could be mitigated by M&A activity given reduced valuations and the aforementioned desire of incumbents to continue investing in their wealth segments.
Robo-advisor adoption will be another interesting trend to watch in 2023; we may learn that the broad rise in asset prices in recent years exaggerated the appeal of low-cost, self-service wealth management tools. When everything is going up, the utility of individualized advice may be less clear; in the more turbulent markets in which we now find ourselves, the value of professional advice tends to become more obvious.
As a result, some of the more heroic assumptions around robo-advisors’ total addressable market, and how much financial advisor activity they will entirely displace (as opposed to augment) may come in for reassessment.
Thoughts on the M&A Cycle
Tom Abrams, Associate Director, Deep Sector Content
M&A in 2022 was a solid down year with negative trends accelerating in the second half. While the uncertainties are different and perhaps more complex in this downcycle, the M&A market will eventually adjust to them and, as the uncertainties diminish in time, recover into another upcycle.
In 2023, we may see more buyer/seller agreement on valuations, clarity on the trajectory of interest rates and inflation, better ESG standards and disclosures, the end of the Russian-Ukrainian war, and perhaps some stability in corporate cash flows. Altogether, these positives could put the market on better footing heading into 2024 before the next U.S. presidential election.
Though more restructuring transactions are important to keep investment banker books full, these can often be lower margined and/or smaller in size. Other business areas the publicly traded banking houses mention as improving to offset lower M&A activity include advisory activities on debt, private capital fundraising, shareholder interactions, activist defense, capital markets, equity sales and trading execution, and wealth management.
Fixed income: Global Central Banks Will Remain Front and Center as Investors Navigate Credit Quality
Pat Reilly, SVP, Senior Director, Americas Analytics
If 2022 will go down as “The Year of the Central Bank” in periodicals and journals worldwide, then where does that leave fixed income investors looking ahead over 2023? Certainly the Federal Reserve, European Central Bank, Bank of Japan, and Bank of England will continue to be headline risks.
With respect to the Fed, the current dot plot reflects 25 basis point increases at each of the February and March meetings before potentially pausing into the summer. I see 2023’s fixed income storyline revolving around credit. More specifically, I see a divergence between investment grade and high yield issuers.
Investment grade issuers will generally be looking at business as usual, albeit at higher rates than those seen over the recent past. Continued global demand for yield will be supportive of the space. High yield issuers will be looking at a more restrictive issuance environment.
Investors should look to understand valuation through a lens of higher spreads and the return of investor protections. Underwriters should seek to understand liquidity and solvency positions of these issuers, particularly in Energy, where any global supply/demand shocks related to pandemic re-opening could allow for an easy flip flop between a risk-on and risk-off environment. 2023 sees a shift from the macro rollercoaster to valuation bumper cars.
ETF Flows Continue Strong With Further Fee Compression Expected
Elisabeth Kashner, Vice President, Director of ETF Research and Analytics
The drive towards ever-lower ETF costs shows no sign of slowing in 2023 as investors remain cost-conscious across asset classes and exposure styles. Asset managers must scramble to stay competitive as a flood of new entrants packs an already crowded field. The strong momentum from last year provided a foothold for further ETF cost compression and continued strong inflows this year. The 2022 year-end results have set a high bar:
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Total US ETF flows reached $605 billion
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Full-year average US ETF cost was 0.17% overall, and even lower for equity ETFs and bond ETFs, at 0.16% and 0.14%, respectively
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Actively managed equity ETFs that gained market share cost 0.34% on average; those that lost market share cost 0.53%
ESG Standards to Accelerate Further in 2023
Peter Kocubinski, Principle News Analyst, ESG Content Lead, FactSet StreetAccount
The push for greater sustainability standards amidst growing politicization will be a major story in 2023. For example:
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The International Sustainability Standards Board is creating new standards with the goal of linking company sustainability practices with corporate value creation
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EU Sustainable Finance Disclosure Regulation level 2 disclosure requirements are more stringent for companies and sustainable funds and now include certain nuclear and gas activities as green
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The U.S. Securities and Exchange Commission is slated to mandate greenhouse gas emission disclosures for companies this year while also implementing guardrails around what investment vehicles can be labeled as “ESG.” Opposition from U.S Republicans towards ESG policies will likely mean more legal challenges and fund manager boycotts. In addition, state-level efforts are likely to increase on both sides of the aisle.
The global energy transition is a second big theme this year, turbocharged as nations seek greater energy security while also trying to fulfill recent emissions reduction pledges. The U.S. Inflation Reduction Act and the REPowerEU plan represent major drivers of climate-related investment opportunities, while competition for raw materials is also expected to rise.
Protecting biodiversity and valuing natural capital is a growing concern following the Kunming-Montreal agreement at COP15. Analysts have also flagged voluntary carbon credit markets and water security as ascending themes; others expect increased investor focus on owning ESG improvers as an investment strategy.
Digital Assets: A Mixed Bag
Sean Ryan, VP/Associate Director
The outlook for digital assets in 2023 is bifurcated: On one hand, there is an extremely wide range of plausible outcomes in the spot market for cryptocurrencies, but on the other hand, the maturation of the broader ecosystem—as reflected in the institutionalization of the market and the increasing commercialization of public blockchains—looks set to continue.
Regarding the cryptocurrency market, it is important to recognize that FTX may be neither the last nor the largest shock to the system. Certain large exchanges and stablecoins continue to face questions both ethical and prudential. Failures of either would likely catalyze another round of forced deleveraging in the market, driving prices materially lower. At the same time, if 2023 sees interest rates reach a cyclical peak and begin moving lower, and Congress establishes a prudent regulatory regime, then this year may see the start of another bull market for cryptocurrency.
There is less uncertainty regarding the maturation of the digital asset ecosystem. VC-backed entrepreneurs and large corporations are likely to continue building out projects on both public and private blockchains, as they did throughout 2022.
In finance, the tokenization of real-world assets on blockchains like Avalanche and Provenance is gaining momentum, as is the use of blockchains for real-time payments. While there is a useful distinction to be made between blockchain technology and cryptocurrencies, it bears noting that these use cases—all embryonic but with very large potential TAMs—create natural buyers for cryptocurrencies and thereby support the investment case for them.
On the market structure side, we should continue to see trusted, regulated on-shore entities like Fidelity and the EDX cryptocurrency exchange (backed by Fidelity, Schwab, and Citadel, among others) displace unregulated firms or lack a history of compliance with rigorous regulatory regimes.
There are risks here as well. Where VC funding will bottom out is an open question, and regulation could turn out to be quite restrictive. Some sort of Glass-Steagall regime that walls off digital assets from depositories is not out of the question. Yet even these would tend only to slow, rather than stop, the maturation of digital assets.
Events and Trends Expected to Impact Energy Markets
Kathryn Downey Miller, SVP, Energy Strategy
BTU Analytics recently presented a preview of the events and trends we believe will impact energy markets in the year ahead across oil and gas, power, and energy transition. We invite you to read the whole outlook.
This blog post is for informational purposes only. The information contained in this blog post is not legal, tax, or investment advice. FactSet does not endorse or recommend any investments and assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this article.
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