What to Expect in the Second Half of 2023

What You Need to Know

The economy remains resilient, and rising profits are pushing stock prices higher.
New home sales are at the highest point in a year, and auto sales are similarly rebounding.
The Fed is in the ninth inning of raising interest rates, but rates will remain elevated to combat stubborn inflation.

This year has been a boon for market bulls, but an impending recession and the outlook for interest rate hikes are top of mind. The consensus anticipates a recession — though if and when it will strike remains to be seen — and the inverted yield curve (a lagging indicator) is more than a year old.

We assess the market and the economy, coupled with Federal Reserve (Fed) policy, to frame this midyear outlook.

The S&P 500 Index rose 16% by June 30, powered by a stronger-than-expected economy, which in turn was propelled by an unwinding of unprecedented pandemic stimulus. Resilient consumers, representing 70% of GDP, are leading the charge, underpinned by a tight labor market, high wages and heightened incomes from declining inflation.

Abundant Jobs & High Wages

Any worker who wants a job can get one and be paid well. June’s Job Openings and Labor Turnover Survey (JOLTS) continued to show plentiful job opportunities — there are 1.6 jobs available per unemployed person.

June’s ADP Employment Change showed private employment increased by 497,000, with service-providing jobs accounting for 387,000, and goods-producing 124,000. ADP wage growth slowed slightly to 6.4% versus 6.6% last period but remains high.

Challenger, Gray and Christmas reported that job cuts dropped 49% in June, and the four-week moving average of initial claims is 253,000 (375,000 is considered recessionary).

Soaring Services Sector

ISM Services rose to 53.9, with the employment component ticking up to 53.1 from 49.2 last period (both indicating expansion), reflecting strong new orders, backlogs and business activity.

The S&P Global PMI print was 54.4, adding further ballast (anything above 50 is expansionary).

Housing and Autos Are Rebounding

Higher mortgage rates took a toll on housing earlier this year, but buyers are forging ahead; new home sales are at the highest point in a year. Five million millennials are just starting to buy their first homes, and 13 years of underbuilding has spawned an inventory shortage.

Existing-home sales are tepid, stymied by high interest rates: A 5% mortgage rate is a disincentive to buy a new house that comes with a 7% rate. It’s worth pointing out that 82.4% of homeowners have a mortgage rate below 5%, and 62% have a rate below 4%, per Redfin. Notably, 23.5% of homeowners have a mortgage rate below 3% — close to a record.

Auto sales (both new and used) are climbing, understandable considering the pickup in housing, as the two are tightly correlated: A new house requires trips to the mall for furniture, paint and garden supplies.