I’ve been reading investment outlook reports from various firms for a couple of years now. It’s been helpful for me as a founder, since subtle macroeconomic changes can significantly affect my business. Usually I read 15-20 reports* (from firms like Merrill, Vanguard, and Schwab) every summer and write a summary outlining common themes and thoughts. This year I decided to share my findings, so they can be useful to others.
Reviewing last year
In mid-2022, the economy turned a corner when interest rates started increasing. I was fundraising at the time and could sense a mood shift in meetings with investors. After reviewing recently published mid-2022 investment outlook reports, I found some common themes:
- The economy is experiencing increasingly higher volatility
- Recession is unlikely
- Rates are predicted to peak around 4% in Q2 of 2023
- Real assets, dividends, and “quality” are recommended
- Healthcare, industrials, energy, and tech are favored
- Cloud is still a massive trend, despite the downturn
Months later, generative AI became huge (driven by ChatGPT) and interest rates blew past 4%. AI hype dominated the startup world while the rest of the economy kept getting battered by inflation and layoffs. Now, a year since, AI hype has subsided, interest rates are at the highest level in decades, and the finance industry is still reeling from massive bank failures. Things could be better.
Outlook in 2023
The 2023 reports seem more pragmatic than pessimistic to me. Several firms acknowledge a new economic cycle. There is no expectation of a return to 2021 or anything similar. The following are common themes I found shared across various reports, reflecting a subtle consensus.
- Key trends: artificial intelligence and an aging population
- Volatility is likely to persist, as will higher interest rates
- Inflation, driven by supply shocks, will persist but decline
- The impact of high interest rates has yet to be felt (!)
- Rates will peak near 5.5% by 2024 and go to 4% in a year
- A global recession is imminent, starting in late 2023
- In the U.S. the recession is expected to be mild, rolling, and particularly damaging to manufacturing and shipping
- There is lots of surplus cash which should be re-deployed
- The 2023 U.S. market rally is due to just a handful of stocks
- High-quality government bonds and dividend growth stocks are recommended
- Large-cap growth stocks and emerging markets (India, Brazil, Vietnam, Indonesia, Mexico) are favored
- The U.S. dollar has peaked and started a gradual decline
- International stocks, especially Japan, offer opportunities
- Banks pulling back means more demand for non-bank lending and private credit
- Commercial real estate, especially office space, is in danger
- The U.S. labor market remains resilient
In short, firms recommend predictable, profitable investments. The worst may be almost over, but the consensus seems to be that prior assumptions no longer apply and that the economy will have to go through an adjustment period.
Thoughts for startups
The reports acknowledge that smaller companies are going to struggle for the foreseeable future, which naturally includes most startups. It’s likely safe to say fundraising and sales will be tough for the next year, if not longer. For many companies, this means an “extinction event” is all but inevitable. Others will have to adapt to a changing environment.
Impact on fundraising
There are multiple factors that will make fundraising difficult in the short term. Investment firms advising a defensive approach (large caps, dividends, bonds), warnings of persistent high interest rates, and banks pulling back on lending all generate an unfavorable environment for small companies seeking venture funding. Many startups will also fundraise in the fall of 2023 following a difficult 12 months, which means investors will have their pick of investment opportunities. Cash and traction should be top priorities if possible.
Impact on opportunities
A few thoughts around opportunities, some tactical in nature:
- Align your company around AI or health if it isn’t already
- The decline in venture funding and bank lending creates opportunities for offering capital to companies that will desperately need it soon
- Vacant office space could be repurposed or refinanced
- More investment going to emerging markets could create new customers for US firms
- International investments (staff, customers, assets) should be made now, before things get more expensive
- Overpriced products and services, from companies dependent on low interest rates, can now be disrupted
Impact on teams
Startups found it increasingly difficult to compete with Big Tech over the last decade, as the latter offered stability and very lucrative compensation. Now, after the generative AI boom and huge layoffs in Big Tech, hiring for startups should be easier. Weakness in office demand and inflation contributing to high cost of living would imply continued remote work in cheap areas, which should help with stretching hiring budgets.
After the shock of 2022, 2023 is looking like the beginning of a new harsh economic environment last seen over a decade ago. I’m optimistic about 2024 as the “turnaround” year, but it seems like most startups will struggle to survive until then. Here’s looking forward.
*: Reports from the following firms were used for this post: Lazard, Schwab, BlackRock, Vanguard, T. Rowe Price, Coutts, First Republic, Merrill, Capital Group, Commonwealth, Invesco, J.P. Morgan, Nuveen, Wells Fargo, LPL Financial, Citi, Julius Baer