US equity markets got off to a great start in 2023, markets turned optimistic and priced in a higher probability of soft-landing, sending valuations higher despite lukewarm economic data. Over the month of January, US equities gained across the board, the Dow, S&P 500, and NASDAQ gained 2.83%, 6.18%, and 10.68% respectively.

The US economy managed to grow in 2022 Q4, leading indicators such as PMIs have improved, but remain in contraction zone. More importantly, inflationary numbers showed continued easing in both headline and core numbers. However, the labour market remained red hot, with the lower jobless claims, higher payrolls and job vacancies, pressures on core inflation remains intact. Henceforth, monetary policy would likely continue tightening along its original path, the Fed raised Fed Funds rate by 0.25%, Fed President Jerome Powell said more tightening could be needed, which in turn could hit financing conditions and the economy itself.

In short, while we are confident on the general direction, i.e. the easing of inflation, economic slowdown, easing pace but continuation of rate hikes, and quantitative tightening to continue, a lot of uncertainty remains over the timing and the magnitude of the events. The US equity market is still exposed to further downside risks, corporate earnings could see further downward revisions due to the slowdown and possible recession, and valuations could be further compressed. Given the recent fierce rally to start off the year, we think that the downside risks do not justify the current valuations considering the high risk-free rates. We continue underweighting US equities before there is sufficient correction in the market.