After a rocky 2022, investors are more bullish on U.S. equities in 2023. This is partly due to investor expectations that inflation has peaked and the Federal Reserve will stop raising interest rates this year. But a white paper issued by T. Rowe Price argues that not a lot has changed since 2022, and investor positivity over markets “feels premature.”
“Stocks leading the market are changing at an unusually fast pace, regardless of fundamentals, making it more difficult to find reliable sources of alpha,” wrote T. Rowe Price Portfolio Manager Justin White. “On a risk/reward basis, the U.S. equity market also looks broadly expensive, in our view, meaning performance is likely to be driven by individual stock selection.”
T. Rowe Price cited a few reasons for its cautious outlook. First of all, while inflation is coming down from its peak of 9% in June, it’s likely that the path to bringing consumer prices down to the Fed’s target of 2% could take much longer than investors currently expect.
The recent banking crisis triggered by the collapse of Silicon Valley Bank is another headwind facing stocks. While the immediate crisis is expected to pass, White wrote that it’s still a “shock to the system” that “will cause a tightening of financial conditions.”
Another feature of the U.S. equity market during the early part of the year that T. Rowe Price has observed is that companies that posted their strongest year‑to‑date returns missed their target earnings. In contrast, those that met their earnings expectations have generally underperformed. This suggests that finding market winners in such an environment is far easier said than done.
If T. Rowe Price is indeed correct and investors are overly optimistic about markets, then that means it will continue to be difficult to find clear market winners. That’s where active management can help. Active management can provide not only the flexibility to find potential sources of alpha across the market but it can also offer portfolios with the diversification needed to mitigate potential risk.
As part of its lineup of active ETFs, T. Rowe Price offers a suite of actively managed equity ETFs, including the T. Rowe Price Blue Chip Growth ETF (TCHP ), the T. Rowe Price Dividend Growth ETF (TDVG ), the T. Rowe Price Equity Income ETF (TEQI ), the T. Rowe Price Growth Stock ETF (TGRW ), and the T. Rowe Price U.S. Equity Research ETF (TSPA ).
“Active managers can reposition the portfolio toward favored names when they are temporarily trading at lower levels,” said VettaFi’s head of research Todd Rosenbluth.
T. Rowe Price has been in the investing business for over 85 years and conducts field research firsthand with companies, utilizing risk management and employing a team of experienced portfolio managers carrying an average of 16 years of experience.
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