What key factors could drive stock markets in 2023? Ashwath Damodaran explains

“In Nov 22, long term treasury rates dropped, the treasury yield curve became more inverted, the S&P was up >5% & the ERP dropped from 5.48% to 5.26%. Investors, rightly or wrongly, are pricing in expectations of easing inflation & a slowing economy,” Damodaran, who teaches corporate finance and valuation at the Stern School of Business at New York University (NYU), said in a tweet on Thursday.

“While there is basis for both expectations, there are questions about how quickly inflation will come down and how much the economy will slow. How those questions get answered will largely determine the course of markets in 2023,” he added.

Yield-curve inversions actually predict that the US Fed’s monetary policy is getting too tight. Wall Street equities were mixed while US Treasury yields pared gains and the dollar lost ground after the Federal Reserve Chair Jerome Powell said the central bank could slow the pace of interest rate hikes as soon as December, even as he cautioned that inflation was still too high.

The US Federal Reserve Chair Jerome Powell recently signaled a pivot in monetary policy away from ultra-aggressive interest rate hikes to counter inflation. Powell said that the US central bank could slow the pace of interest rate increases as soon as at its December meeting. However, several Fed officials including Powell have lined up to warn that rates will continue to rise and stay elevated, with the possibility of no cut until 2024.

Meanwhile, Indian stock market has outperformed most emerging markets (EMs). The benchmark indices Sensex and Nifty have surged to record high levels this week as foreign institutional investors (FIIs) doubled down on Indian shares in November 2022, and, as per experts, are now holding the highest quantity of bullish bets on Nifty and Bank Nifty futures in three years and seven months.