2023 Outlook: What’s Next for US Inflation, Growth, and Capital Markets?

Apollo Chief Economist

The central themes of 2022—namely high inflation, potential economic recession, and dislocated asset prices—are expected to continue to be with us as we head into 2023. But the story of those elements will be different, as the fast-and-furious tightening of monetary conditions by the Federal Reserve in 2022 has begun to take effect across the macroeconomic spectrum—from inflation, to spending, hiring, and capital expenditures—as well as in the capital markets.

Key Takeaways

  • US inflation appears to have peaked in June 2022, with the Consumer Price Index (CPI) showing us good reason to believe that we’re now in the beginning of a downward trend. The decline in inflation in recent months has been driven mainly by the goods sector, while prices of services have proven stickier. The downtrend is welcome news for markets and the Fed, but it doesn’t mean that we will get back to the Fed’s 2% annual target anytime soon. In fact, history shows it could take up to two years for us to get there.
  • The decline in inflation is taking place without a sharp increase in the unemployment rate, which points to a higher probability that the Fed might engineer a much-desired soft landing of the US economy, a scenario that many thought very unlikely just a few months ago.
  • The sequencing of how the Fed reaches its dual mandate (taming inflation and maintaining full employment) is key for capital markets. Receding inflation first, moderating employment later means that the need for “demand destruction” on the part of the Fed decreases.
  • A less aggressive Fed—or a potential Fed “pivot” in 2023—should be bullish for asset prices (public and private) ranging from rates, to credit, to equities. That said, capital markets will likely remain vulnerable in 2023 and volatility will likely persist because capital remains scarce and expensive, and high-yield primary credit markets will likely stay virtually shut down for the time being. Selectivity in asset selection, valuations, and entry points will be paramount.
  • Also, many investors—weary and battered after a disastrous performance of 60/40 portfolios of public equities and bonds in 2022—are likely to turn to private markets as they adjust their holdings in 2023. Purchase price matters and we see a historic entry point in private credit and attractive opportunities in private equity for investors able to be providers of capital in a time of stressed and distressed markets.

The information herein is provided for educational purposes only and should not be construed as financial or investment advice, nor should any information in this document be relied on when making an investment decision. Opinions and views expressed reflect the current opinions and views of the authors and Apollo Analysts as of the date hereof and are subject to change. Please see the end of this document for important disclosure information.

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The Standard & Poor’s 500 (“S&P 500”) Index is a market-capitalization-weighted index of the 500 largest U.S. publicly traded companies by market value.

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