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Equity Market: The large technology company stocks were beaten up in 2022 but have soared ahead in 2023 – a trend related to investor excitement over the potential of artificial intelligence. The heralded Magnificent Seven includes Nvidia, Meta, Tesla, Amazon, Apple, Microsoft, and Google. These seven stocks now account for one-third of the total S&P 500 market cap of $37 trillion.

The strong performance of technology is seen in the Nasdaq Composite Index which was ahead 13.05% in the second quarter and 32.32% for the year-to-date. The S&P 500 was ahead 8.74% for the quarter and 16.89% for the year.  The leaders in the S&P 500 have been Information Technology and Communications Services. Most sectors in the S&P 500 have lagged the total index. The Russell 2000 index of small stocks was positive by 5.21%. for the quarter and 8.09% for the year.  Perhaps the best indicator of actual market performance was the Dow Jones Industrial Average, which moved ahead only 3.97% for the quarter and 4.94% for the year.  

The Market: Given the probability of recession, corporate earnings have already weakened. Profits of stocks in the S&P 500 are predicted to show about 10% average earnings drop when second quarter numbers are reported compared to the same stretch in 2022.

We always look carefully at Price/Earnings ratio for the S&P 500. The forward 12-month P/E ratio is now 19.3 -- much higher than the 100- year average of 15. The ratio grew from 17.8 on March 31 because of the positive market performance in the first quarter. The effect of lower corporate earnings may push the ratio even higher in the months ahead.

So, we view the U.S. equity outlook cautiously due to the expensive valuations and deteriorating business cycle. We think the recent fascination with the large tech companies may fade considerably as fundamentals come into view. We believe the overall market will stay in its current trading range for the remainder of 2023. Further growth of 5% would be our most optimistic outlook. As stated, we think the forces of inflation and recession need to play themselves out for the stock market to see a reliable and sustained rally.

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