The bull case for equities Our 2023 base case of positive returns for developed Value stocks, however, are now quite reasonably priced market equities rests on a key view: a moderate compared with history. We have stronger conviction recession has already largely been priced into many that value stocks will be higher by the end of 2023 than stocks. we do for those growth stocks that still look expensive. By the end of September 2022, the S&P 500 had However, a peak in government bond yields could declined 25% from its peak. Historically, following this provide some support to growth stock valuations in level of decline, the stock market has tended to be 2023. higher a year later. There have been two exceptions Another risk to equities is that consensus 12-month since 1950: the 2008 financial crisis and the bursting of forward earnings expectations currently look too high, the dot-com bubble in 2000. having only declined by about 5% from their recent We don’t see macroeconomic parallels with 2008, but peak. A recession is likely to lead to further reductions what about valuation similarities with 2000? One risk in earnings expectations. We believe that in a moderate to our bullish base case scenario for stocks would be recession, 12-month forward earnings estimates are if valuations still need to fall considerably further from likely to decline somewhere around 10% to 20% from the here. peak, as they did in the 1990s or early 2000s. S&P 500 valuations started 2022 not far off those seen While some might argue that when these earnings during the dot-com bubble. However, high valuations downgrades materialise, they will lead the stock market could largely be attributed to growth stocks (Exhibit 10). lower, we believe that the market has already priced Despite underperforming in 2022, these stocks are still in some further downgrades to consensus forecasts not particularly cheap by historical standards. (Exhibit 11). For example, at the beginning of 2022, US bank stocks were reasonably valued at 12x earnings and consensus 12-month forward earnings forecasts rose about 10% over the course of the year – yet bank stocks Exhibit 10: Growth stocks still aren’t cheap by historic fell about 35% from peak to trough. This supports our standards view that the market is already factoring in worse news MSCI World Growth and Value forward price-to-earnings ratio than consensus earnings forecasts suggest. x, multiple 36 32 Exhibit 11: Markets often move ahead of earnings forecasts MSCI World earnings growth and price return 28 % change year on year 24 60 20 40 16 20 12 0 8 ’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16 ’17 ’18 ’19 ’20 ’21 ’22 -20 Growth Value Source: MSCI, Refinitiv Datastream, J.P. Morgan Asset Management. Past -40 performance is not a reliable indicator of current and future results. Data as of 31 October 2022. -60 ’00 ’02 ’04 ’06 ’08 ’10 ’12 ’14 ’16 ’18 ’20 ’22 Earnings growth Price return Source: MSCI, Refinitiv Datastream, J.P. Morgan Asset Management. Earnings are 12-month forward earnings expectations. Past performance is not a reliable indicator of current and future results. Data as of 31 October 2022. J.P. Morgan Asset Management 9