Reassessing Risk Asset Pricing Amid U.S. Soft-Landing Expectations
By the second quarter of 2023, the core narrative in U.S. financial markets began to show structural shifts. After a year of aggressive rate hikes and substantial asset price adjustments in 2022, inflation remained elevated but showed a gradual declining trend. The labor market remained resilient, prompting a reassessment of the timing and severity of a potential economic downturn. What had previously been considered a low-probability soft-landing scenario gradually entered mainstream discussion, becoming a key assumption influencing asset pricing.
Against this backdrop, the logic for evaluating risk assets adjusted accordingly. Judgments were no longer based on rapid sentiment recovery but returned to the fundamentals of the pricing mechanism itself. As expectations for a soft landing increased, risk did not disappear—it merely redistributed across different forms. Markets needed to reassess the balance between growth, interest rates, and valuations. This shift required portfolio decisions to move from macro narratives back to a more disciplined, constraint-based analytical framework.
During the early 2023 market rebound, the pace of price recovery in some risk assets clearly outstripped improvements in underlying fundamentals. With interest rates still in restrictive territory and financing costs elevated, valuations could not simply revert to the pricing levels seen in a low-rate environment. Consequently, allocation decisions placed greater emphasis on corporate earnings quality, cash flow stability, and sensitivity to interest rate changes, rather than relying solely on valuation expansion driven by improving macro expectations.
From a portfolio perspective, allocations gradually shifted from a defensive-first posture toward selective offense. This adjustment was not a directional bet but the outcome of a reevaluation based on risk premia. Assets with fully compressed valuations yet possessing durable medium- to long-term competitive advantages offered relatively more attractive allocation opportunities, whereas assets primarily supported by liquidity-driven price gains remained approached with caution to avoid excessive risk during sentiment-driven phases.
At the same time, relative value across risk assets was reassessed. As soft-landing expectations continued to build, different assets responded differently to shifts in the economic trajectory. Allocation decisions emphasized cross-asset comparisons rather than single-market calls, evaluating each asset’s return resilience under a growth slowing but not in recession scenario to optimize portfolio structure. This approach reflected a core institutional investment logic centered on relative value, rather than reliance on absolute directional bets.
As of April 2023, markets remained engaged in ongoing debates over the future economic path. Portfolio decisions avoided premature conclusions, instead reexamining the pricing logic of risk assets to preserve flexibility across multiple macro outcomes. A soft landing was not a signal of risk removal but a stage demanding higher-quality analysis and disciplined execution. By returning to fundamentals and valuation constraints, risk asset allocations were anchored within a framework grounded in realistic boundaries.
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