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3 | 2023 Investment Outlook | December 12, 2022 EQUITY We See A Resilient Economy Without a Looming Collapse KEY POINTS In our view, the first quarter of 2023 has the ingredients to build on strengths of 1 the fourth quarter of 2022. Andrew Slimmon Head of Applied An inverted yield curve hints at a potential economic slowdown at some point in Equity Advisors 2 the year ahead. 3 We're scaling back on megacap stocks after a mega run-up. 2022 Recap ƒ We continue to believe when 2022 is over, equity investors will think, “That didn’t turn out nearly as bad as it felt at times.” The State of Future Earnings ƒ The consensus view is that early in 2023, earnings will collapse, bringing the stock market down with them. ƒ Sectoral leadership in the market suggests otherwise. Financials, industrials and materials have all outperformed in October and November. As noted by market consultant John Raphael: “It’s puzzling to me why these brokers and investment banks are acting so well. Would you buy 1 these stocks if the SPX had 10% downside?” ƒ If the economy were going to collapse in the first quarter of 2023, these economically cyclical groups would not be leading today. 2 ƒ The S&P 500 equal-weighted is down -11% while the S&P 500 cap-weighted is down -17%. Broader breadth is a bullish signal. ƒ My conclusions? The economy is proving too resilient, causing the “looming collapse” in earnings to remain elusive for yet another quarter. I expect earnings to drip down slowly, frustrating market bears. ƒ With continuing improvements on the inflation front mixed in, you have the ingredients for a strong first quarter. What We Can Learn from Yield Curves ƒ Yield curves are inverted (when interest rates on long-term bonds fall lower than those of short-term bonds), a fact that requires attention and respect. ƒ Yield curves are not very good at predicting when a slowdown occurs, only that it will occur at some point in the future. ƒ Could the scenario of a weaker second half following a surprisingly strong first half occur in 2023? Said another way, could the narrative change to “weakness in the market–but from higher levels?” Maybe, but that is not the consensus.

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