18 | 2023 Investment Outlook | December 12, 2022 What We Are Watching ƒ There are two ways of losing money in equity investing: either the earnings go away or the multiple goes away. The main risk we see ahead is earnings. However, with forward earnings expected to rise over the next year and margins close to record levels, we do not see earnings signaling a significant economic slowdown, let alone a serious recession. Meanwhile, current derating of some stock P/E ratios has reduced, but not completely removed, the multiple risk. ƒ We believe the major threat to earnings in the short term is the prospect of an economic slowdown as central banks continue to attempt to counter inflation through higher rates. The pace may differ by region. Longer term, there could be further pressures on earnings, such as the need to build more resilient supply chains or potentially higher corporate tax rates as governments look to repair their finances. ƒ Given the uncertain macroeconomic landscape and the room for policy errors, we continue to advocate for a portfolio of high-quality compounders. The combination of these companies’ recurring revenues and pricing power should protect revenues and margins in a downturn, providing asset owners with earnings resilience and relative predictability through tougher, more volatile times. “Investing in companies with true pricing power is crucial because earnings should be relatively resilient in a squeeze on the wider market’s profitability.” The index performance is provided for illustrative purposes only and is not meant to depict the performance of a specific investment. Past performance is no guarantee of future results. See Disclosure section for index definitions. Risk Considerations: The value of investments may increase or decrease in response to economic and financial events (whether real, expected or perceived) in the U.S. and global markets. The value of equity securities is sensitive to stock market volatility. Diversification does not eliminate the risk of loss. Active management attempts to outperform a passive benchmark through proactive security selection and assumes considerable risk should managers incorrectly anticipate changing conditions.