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2023 Global Market Outlook

Earnings, economic activity, and employment have yet to be impacted by central bank rate hikes1

Our 2023 Equity Market Outlook call featured Michael Kantrowitz, Chief Investment Strategist and Head of Portfolio Strategies at Piper Sandler. Kantrowitz’s expertise includes identifying changing trends that influence business cycles while providing forward-looking investment recommendations on global asset allocation, sector positioning, stock selection and portfolio construction. Buy-side investors ranked Kantrowitz as one of the top three portfolio strategists in the Institutional Investor Magazine All Americas Research poll in 2020.

What is happening in equity markets?

Global markets are under pressure from several headwinds, including US dollar strength and rising commodity prices and long-term interest rates. Simultaneously, global markets are experiencing elevated levels of inflation, forcing central banks to raise policy rates aggressively.
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Source: Piper Sandler, November 2022
This combination of factors has led to market multiples contracting significantly over the course of 2022. However, it’s important to note that earnings, economic activity, and employment have yet to be impacted by central bank rate hikes. The fact that rates are higher has been priced into markets but the actual impact of the rate hikes has not been priced into the market yet.
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Source: Piper Sandler, November 2022

When will equity markets bottom?

Kantrowitz evaluates markets using a framework that focuses on Housing, Orders,  Profits and Employment. Housing is the leading indicator for economic activity and the US housing market peaked in 2021 and has been declining since. The ISM  Manufacturing New Orders Index peaked in late 2021 and continues to fall. Corporate earnings are currently under pressure from rising rates, rising commodity prices and wage inflation and analysts estimates will likely come down with fourth quarter results. Finally, while the overall labour market continues to be robust more companies are announcing layoffs.
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Source: Piper Sandler, November 2022

Where should investors allocate capital?

Rather than investing in growth or value, Kantrowitz pointed out that there are  dominant factors that investors should look for in the companies they invest in. Investors should allocate capital to companies with strong profitability and earnings growth, strong balance sheets with high debt service coverage and consistent free cash flow generation.
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Source: Piper Sandler, November 2022
Investors should favour high quality companies in industries with strong fundamentals. Given the expectation that markets will trough next year, it makes sense that investors should overweight low beta stocks to reduce overall portfolio volatility.
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Source: Piper Sandler, November 2022

Starlight Capital Portfolios

In the second chart on page one, Kantrowitz outlines the contribution to returns of  multiples and earnings for the S&P 500 and each subsector in 2022. Returns in 2022 were primarily driven by multiples falling in response to interest rates rising. Of note is the fact that Utilities, Real Estate, Industrials and Financials generated strong EPS  growth in 2022 and we expect this to continue in 2023. Starlight’s portfolios are significantly exposed to these four subsectors and the table on this page demonstrates the strong underlying performance of our holdings.
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Source: Piper Sandler, November 2022
Starlight Capital continues to allocate capital to high quality business with strong track records of cash flow growth that supports consistent dividend growth. For investors looking to reduce the volatility of their portfolios while gaining exposure to concentrated portfolios of high-quality businesses with rising cash flows and dividends we invite you to partner with us.
1Source: Piper Sandler. Starlight Capital 2023 Global Market Outlook Call ft. Piper Sandler’s Michael Kantrowitz.

Certain statements in this document are forward-looking. Forward-looking statements (“FLS”) are statements that are predictive in nature, depend upon or refer to future events or conditions, or that include words such as “may,” “will,” “should,” “could,” “expect,” “anticipate,” “intend,” “plan,” “believe,” or “estimate,” or other similar expressions. Statements that look forward in time or include anything other than historical information are subject to risks and uncertainties, and actual results, actions or events could differ materially from those set forth in the FLS. FLS are not guarantees of future performance and are by their nature based on numerous assumptions. Although the FLS contained herein are based upon what Starlight Capital and the portfolio manager believe to be reasonable assumptions, neither Starlight Capital nor the portfolio manager can assure that actual results will be consistent with these FLS. The reader is cautioned to consider the FLS carefully and not to place undue reliance on FLS. Unless required by applicable law, it is not undertaken, and specifically disclaimed that there is any intention or obligation to update or revise FLS, whether as a result of new information, future events or otherwise. Commissions, trailing commissions, management fees and expenses all may be associated with investment funds. Please read the prospectus before investing. Investment funds are not guaranteed, their values change frequently, and past performance may not be repeated.

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