Economic Factors We’ll Be Watching in the 2nd Quarter

April 14, 2023

By Tim Courtney, Chief Investment Officer


Following an up-and-down-and-up first quarter for the stock market,1 with the recent failures of Silicon Valley Bank and Signature Bank making global headlines,2 here are three key issues we’ll be keeping a close eye on during the second quarter:

1. Inflation/Interest Rates: This has been the top consideration for several quarters and remains the key factor driving almost all market behavior. Looking at the yield differences between nominal Treasury bonds and TIPS bonds, the market expects inflation to average about 2.4% per year over the next three years.3 This is a pretty low level considering inflation has been only slowly decelerating and now stands at 6%. The market seems to think the banking crisis will slam the brakes on inflation, and maybe it will.4

However, it’s fair to say that the market has grossly underestimated inflation over the last two years. This may still be happening, and it could make more sense to plan on inflation staying elevated for a while.

2. Potential Recession: Market observers continue to await what has been called the most-anticipated recession in U.S. history.5 Initial expectations that it would hit early in 2023 keep getting pushed back.6 The economy has continued to show resilience in the face of escalating interest rates.

The new factor in a potential recession is the banking panic as depositors have pulled billions from regional banks.7 This recent turmoil might have tipped the odds of a recession higher, while also moving up the time frame. As banks show greater concern about their balance sheets and take a more conservative approach to lending, we’ll see broader economic effects in the form of decreased borrowing and growth.

3. Earnings: This aspect reflects directly on the fundamentals of the companies we all invest in. The S&P 500 achieved earnings per share of about $200 in 2022.8 Current expectations call for a slightly higher number in 2023, but estimates are falling and may actually end up lower than last year’s number.9

While it might seem disappointing that earnings could be hard-pressed to even match last year’s numbers, the market is actually still working off excesses and distortions caused in 2020 and 2021. The latter year especially saw a huge increase in earnings that clearly represented an aberration.10 So it’s understandable that earnings are moving back toward their long-term trendline.

Amid the current inflationary environment, the market has become fixated on actual and potential interest rate hikes by the Federal Reserve. We believe rates and inflation will remain higher for longer than what markets have expected. At some point in 2023, we think we will see the market get over its myopic fixation on rates and start focusing on fundamentals again. If you have any questions, please contact your Exencial Advisor.



  1. MarketWatch (data as of 3/29/23) — S&P 500 Index
  2. PBS (3/14/23) — Analysis: Why Silicon Valley Bank and Signature Bank failed so fast
  3. Federal Reserve Bank of New York (3/13/23) — Short-term inflation expectations decline sharply; labor market expectations improve
  4. US Inflation Calculator (3/29/23) — Current US inflation rates: 2000-2023
  5. Bloomberg (1/3/22) — The most-anticipated downturn ever
  6. Associated Press (2/27/23) — 2023 US recession now expected to start later than predicted
  7. The New York Times (3/13/23) — Regional banks slammed by fear of a broader financial crisis
  8. Standard and Poors (4/6/23) — S&P 500 earnings and estimate report (operating earnings)
  9. Seeking Alpha (2/22/23) — Winter 2023 snapshot of expected future S&P 500 earnings
  10. Multpl.com (9/30/23) — S&P 500 earnings by year


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