- Stocks are likely to struggle again in 2023, according to PIMCO.
- "Equities have become less attractive amid higher interest rates and recession risk," strategists at the firm said.
Stocks aren't going to look like an attractive asset class anytime soon with a recession set to rattle the US economy in 2023, according to PIMCO.
The $1.7 trillion investment management firm said in a recent research note that it is bearish on equities but bullish on bonds – which could offer similar returns at a lower risk level.
Recessions weigh on stocks because they trigger a slowdown in consumer spending, reducing companies' profit levels – but PIMCO believes that's not yet reflected in the earnings per share guidance issued by companies on the benchmark S&P 500 index.
"Equities appear richly priced. Our models show a much lower recession probability is priced into the S&P 500 than macro indicators suggest, while earnings per share (EPS) estimates appear overly optimistic," economist Tiffany Wilding and CIO for global fixed income Andrew Balls said.
Stocks were one of the best-performing asset classes of 2020 and 2021 but slumped last year, with the S&P 500 falling 19% and the Nasdaq Composite plummeting 33%.
The Federal Reserve ramped up its campaign to cool inflation by raising interest rates from near-zero to 4.5%, which weighed on equities by eating into the future cash flows that make up a part of their valuation.
Investors should now be prioritizing bonds and fixed-income funds over stocks in their portfolios, according to PIMCO.
"Equities have become less attractive amid higher interest rates and recession risk. Higher bond yields have precipitated a move from a 'TINA' market (where "there is no alternative" to equities) to one in which appealing alternatives exist," Wilding and Balls said.
Unlike stocks, bonds offer investors a fixed rate of return – which can prove more attractive in times of economic uncertainty. Yields on 2-year and 10-year US Treasury notes currently trade at 4.14% and 3.46%.
"We continue to see a strong case for investing in bonds, after yields reset higher in 2022 and with an economic downturn looking likely in 2023," PIMCO said. "Fixed income markets today can offer broad opportunities to build resilient portfolios with the potential for both attractive returns and mitigation against downside risks."