The U.S. economic outlook remains highly uncertain, but we believe the environment will begin to reveal itself more clearly—good, bad, or somewhere in between—by the end of 2022. This does not necessarily mean that markets will be quick to respond, and discount appropriately, but we should gain a reasonable idea about how the dust is settling in the U.S. reasonably soon. With the next Federal Reserve (Fed) interest rate‑setting meeting on December 14, there is one further inflation print to be released before that time. With the latest U.S. inflation data coming in below expectations, this remaining data point takes on added significance.
As it currently stands, we believe that we could see three possible economic scenarios play out in the U.S. as we move into the new year. To elaborate on these and on other key questions about the U.S. market outlook in 2023, we spoke with Taymour Tamaddon, portfolio manager of the T. Rowe Price US Large‑Cap Growth Equity Strategy.
1. Can you elaborate on the three possible economic scenarios and how you see U.S. equities—particularly growth stocks—faring in each?
The mild bear. The first possible scenario is that the Federal Reserve manages to orchestrate a relatively quick soft landing. This is undoubtedly the best outcome as far as growth investors are concerned. However, at the same time, we think this is the most unlikely outcome, given where we are currently, and the high degree of uncertainty that remains. In this scenario, interest rates do not have to go much higher, inflation recedes quite quickly in response to rate rises, and economic growth remains generally solid, with modest expansion that is ultimately not too hot and not too cold. However, the probability of this scenario being landed appears slim, in our view.
The moderate bear. This second scenario is the one that we believe to be the most likely outcome—is that we experience a mild recession, but where interest rate rises are soon sufficient to gradually slow the economy and tame inflation from current elevated levels. In this scenario, our expectation is for a few quarters of slowing growth, with inflation gradually inching down, before ultimately seeing early signs of a recovery from mid‑2023.
In such an environment, growth becomes harder to find, and higher‑quality companies with stronger fundamentals, better business operations, and quality management are likely to be rewarded by investors. This is a supportive backdrop for growth investors as individual company quality becomes the principal market driver, rather than being driven by macroeconomic factors or investment momentum. And in a mild recessionary environment, those companies that can continue to grow their earnings, competitive leadership, and market share in the absence of a strong gross domestic product tailwind tend to be growth‑oriented companies, more so than their value counterparts.
This post was funded by T. Rowe Price
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