Five Reasons We See Opportunities in Growth Companies in 2023

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While there are many challenges in 2023 including a potential recession, we are finding strong investment opportunities in select growth companies. Some growth companies could very well outperform the broader market indices, even in a recessionary period.

The top five performing sectors to start 2023 were the five worst-performing sectors in 2022; the top five performing sectors from 2022 have started 2023 as the bottom five. Indeed, the energy sector outperformed the technology sector by more than 90% in 2022! (see Figure 1 below)

Look at 2022 and 2023 as part of a multi-year period to properly judge asset class performance, both at a market return and company fundamental level. While there were “stay at home” beneficiaries in 2020 that unwound last year, there were “inflation” beneficiaries in 2021 and 2022 in the cyclicals and staple sectors. Notwithstanding the recent outperformance of growth, we see five reasons this outperformance will continue the rest of the year. And some of these reasons explain the outperformance we’ve already seen in January.

1. Growth companies are starting 2023 with both lower estimates and lower valuations, a better investment set up for them in 2023 along with a more stable cost of capital environment. As shown in Figure 1, growth sectors like technology and communication services are starting 2023 with both meaningfully lower stock prices and earnings estimates. The drawdown last year in these sectors makes the investment set up better this year as risk rewards for upside potential to downside potential have improved drastically.