Wells Fargo Investment Institute 2023 Midyear Outlook: Navigating end-of-cycle turbulence

Remain defensive in portfolio positioning for now; broader opportunities likely once markets anticipate a U.S.-led global recovery

Wells Fargo Investment Institute (WFII) has released its “2023 Midyear Outlook: Navigating end-of-cycle turbulence.” The report discusses WFII’s guidance to remain defensive in portfolio positioning, as the current economic slowdown is likely to evolve into a moderate recession during the second half of 2023 and into 2024, followed by a gradual, U.S.-led global recovery as 2024 progresses.

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Wells Fargo Investment Institute 2023 Midyear Outlook (Graphic: Wells Fargo)

WFII suggests that investors should have a chance to position for an eventual 2024 recovery, but they might have to do so while the economy is still within the grips of the anticipated recession. For now, the important objective for investors is to understand how recessions evolve and to position defensively.

“Protecting capital during more challenging times is often as important, or more important, than growing capital,” said Darrell Cronk, chief investment officer for Wells Fargo Wealth & Investment Management. “There will come a time to turn more opportunistic in positioning portfolios for a recovery; however, we need to respect the signals and understand when the risk and reward dynamic changes.”

For the remainder of the year, WFII anticipates periods of elevated volatility, especially as financial conditions tighten in the second half of the year. Drivers of this elevated volatility include potential inconsistencies between actual economic and policy trends versus the market’s perceptions of those trends. For example, the Fed's stated policy is to keep rates high while high inflation persists, but markets expect rate cuts. Further, actual earnings have contracted for two consecutive quarters, but markets expect earnings to grow. While the markets realign with these trends, there is potential for these disjoins to create financial-market volatility. WFII believes that earnings will contract further in 2023, and that an economic recession will stall 2023 corporate revenue growth. Profits should rebound through 2024, as the economic recovery gradually takes hold, but corporate earnings may not recapture their 2022 peak until early 2025.

Highlights of WFII’s forecast include:

• The anticipated U.S. GDP (gross domestic product) growth target for 2023 year-end is 1.1%, and 1.5% for 2024.
• Inflation will likely fall below 3% in 2023 and through 2024. The target for inflation in 2023 is 2.9% and 2.8% in 2024.
• The S&P 500 Index is expected to be relatively flat into year-end with stock prices rebounding in 2024. The target range is 4,000 – 4,200 for year-end 2023 and 4,600 – 4,800 for 2024.
• One more interest rate increase is anticipated in 2023, before cuts start in 2024. The Federal funds rate forecast for 2023 is 5.25% – 5.50% and 3.75% – 4.00% in 2024.

The report provides guidance to investors so they can navigate this economic cycle. Included are economic and market forecasts, where WFII sees opportunity, and five portfolio ideas.

Risk Disclosure

Forecasts and targets are based on certain assumptions and on our current views of market and economic conditions, which are subject to change.

All investing involves risks, including the possible loss of principal. There can be no assurance that any investment strategy will be successful and meet its investment objectives. Investments fluctuate with changes in market and economic conditions and in different environments due to numerous factors, some of which may be unpredictable. Asset allocation and diversification do not guarantee investment returns or eliminate risk of loss.

The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor. This report is not intended to be a client-specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold, or sell securities. Do not use this report as the primary basis for investment decisions. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs, and investment time horizon.

About Wells Fargo Investment Institute

Wells Fargo Investment Institute, Inc. is a registered investment adviser and wholly owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.

About Wells Fargo

Wells Fargo & Company (NYSE: WFC) is a leading financial services company that has approximately $1.9 trillion in assets, proudly serves one in three U.S. households and more than 10% of small businesses in the U.S., and is a leading middle market banking provider in the U.S. We provide a diversified set of banking, investment and mortgage products and services, as well as consumer and commercial finance, through our four reportable operating segments: Consumer Banking and Lending, Commercial Banking, Corporate and Investment Banking, and Wealth & Investment Management. Wells Fargo ranked No. 41 on Fortune’s 2022 rankings of America’s largest corporations. In the communities we serve, the company focuses its social impact on building a sustainable, inclusive future for all by supporting housing affordability, small business growth, financial health, and a low-carbon economy.

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Additional information may be found at www.wellsfargo.com | Twitter: @WellsFargo.

CAR-0623-01316

News Release Category: WF-ERS

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