The US economy continues to grow in the face of higher interest rates and a curtailment of balance sheet credit. In fact, the labor force grew by 786,000 jobs, led by women, young and old, returning to the workforce as the unemployment rate increased to 3.7% from 3.5%.

What is most heartening about these trends is the absence of wage inflation. Average hourly earnings rose 0.3% (3.6% annually) an ordinary pace of wage growth hardly symptomatic of a tight, “overheating” labor market.

The next time the Fed eases, it may not be a cure for a cyclical contraction. Rather, it is more likely to signal that they have “succeeded” in causing a major deterioration in employment and must react to it.

Outside of the retailers and large US banks, corporate executives and sell side analysts still seem reluctant to acknowledge a more challenging macroeconomic policy backdrop when issuing guidance and earnings forecasts. While upgrades are no longer outpacing downgrades, an aggregation of their expected earnings growth rates for 2023 has barely budged despite the equity market correction so far this year.

Recessions over the last 30 years have varied widely in their severity, duration and impact at the sector level. In this Bulletin, we consider market valuations after adjusting for a typical recessionary profits decline. By this measure, the market still looks somewhat expensive at over 20x EPS. Nonetheless, there are major differences between sectors that investors should be mindful of.

Our equity portfolio strategy is geared to weather a potential earnings recession. Less cyclical segments within healthcare and technology like pharmaceuticals, cyber security and enterprise software offer such opportunities.

Our core allocation to dividend growers continues to outperform as the market abandoned the wish for a Fed pivot. Furthermore, our view that “Bonds are Back” and that investors should seek higher yields from better credits remains fully intact.