IN FOCUS6-8 min read

After the fall: equities and bonds

For the first time in several years, we have a more constructive view on government and corporate bonds. We remain slightly more cautious on equities, but are looking for opportunities to add to our allocation.



Christopher Lewis
Head of Investment Strategy, Wealth Management

After a significant reset in valuations across both equity and bond markets, we have been assessing whether to take advantage of market weakness and rebuild our exposure. For now, we are more comfortable adding to fixed income. We anticipate that there will be better opportunities to add to equities over the coming months.

Markets may be too optimistic on earnings in 2023

The peak to trough decline in S&P 500 earnings per share during recessions


Past performance is not an indicator of future returns and may not be repeated

Source: Refinitiv Datastream, Schroders

Key for both asset classes is the outlook for inflation and interest rates – especially in the US. We may well have seen the peak in US inflation, but year-on-year readings remain high and the Federal Reserve will want to see further evidence of a more persistent downtrend before changing the direction of policy. Historically, more persistent cooling of inflation has required a weaker labour market. We have not seen this yet.

We’re more positive on fixed income...

Our long-running underweight position in fixed income has, at times, been a source of discomfort. However, our persistence paid off in 2022, when bond markets experienced their worst sell-off in decades. Over the last quarter, we have been increasing our exposure to government bonds as valuations have improved and the risk of recession has increased. We are moving gradually, reflecting the fact that bond market volatility could persist as rates continue to rise over the coming months.

To manage our interest rate risk, we prefer shorter maturity bonds which are less sensitive to interest rate changes. Once it becomes clearer that interest rates are at or near a peak, there may well be an opportunity to increase our exposure to longer maturity bonds. These would benefit more if central banks signal they are looking to cut rates to support growth.

...but not quite there on equities

We expect that developed market economies – including the US and UK – will fall into a recession in 2023. Economic activity indicators are therefore likely to decline in the near term. Our view is that we are unlikely to see a more sustained equity market recovery until the negative momentum in economic data slows.

We also want to see signs that earnings expectations have bottomed. Historically, when the US economy has contracted, earnings have on average fallen by 14%. Analysts have lowered their earnings estimates for next year by just 4%. This looks too optimistic in an environment of high inflation and slowing economic growth.

Valuations provide a more compelling case for adding to equities. US equities trade at a slightly higher valuation than the average over the past 15 years, but in all other regions shares are generally cheaper than average – in some cases significantly so. Globally, equity markets therefore look far better value today than they did at the start of 2022. While we are definitely getting closer, our signals are not yet flashing the all clear for equities.

Issued in the Channel Islands by Cazenove Capital which is part of the Schroders Group and is a trading name of Schroders (C.I.) Limited, licensed and regulated by the Guernsey Financial Services Commission for banking and investment business; and regulated by the Jersey Financial Services Commission. Nothing in this document should be deemed to constitute the provision of financial, investment or other professional advice in any way. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested. This document may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements. All data contained within this document is sourced from Cazenove Capital unless otherwise stated.



Christopher Lewis
Head of Investment Strategy, Wealth Management


Economic views
Market reviews
Interest rates
Global economy

Cazenove Capital is a trading name of Schroders (C.I.) Ltd which is licensed under the Banking Supervision (Bailiwick of Guernsey) Law 2020 and the Protection of Investors (Bailiwick of Guernsey) Law 2020, as amended in the conduct of banking and investment business. Registered address at Regency Court, Glategny Esplanade, St. Peter Port, Guernsey GY1 3UF, (No.24546) . Schroders (C.I.) Limited, Jersey Branch is regulated by the Jersey Financial Services Commission in the conduct of investment business. Registered address at 40 Esplanade, St. Helier, Jersey JE2 3QB, (No.31076).

The value of your investments and the income received from them can fall as well as rise. You may not get back the amount you invested.