Don’t Stumble in This Rocky Market Landscape

Stock values worldwide have tumbled so far this year as inflation soars, interest rates rise, earnings growth decelerates, economies slow and Russia invades Ukraine.

AMG believes it will be difficult for the S&P 500 by year-end to regain peak levels reached in January. Many high-flying market sectors will likely remain in correction territory. Still, savvy investors might improve returns over coming months by using a combination of value stocks, stocks with high dividend growth, and hedged equity strategies.

Value stocks remain relatively cheap compared to their history. At the same time, they offer broad diversification across both cyclical and defensive sectors. They pay and grow dividends, and they are less susceptible to high inflation and rising bond yields. U.S. small-cap value stocks are particularly attractive. With inflation riding high and nominal GDP growth (real economic growth plus inflation) likely to continue at a fast pace, small caps offer the best combination of cheap valuations and earnings growth.

Dividend growth stocks also look good. Currently, these equities often have dividend yields north of 2% (compared to the S&P 500 at about 1.4%) and are growing those dividends at a double-digit pace. Coupled with reasonable earnings growth, these stocks offer an attractive total return relative to the broader market. These companies often weather economic and market uncertainty with less volatility.

Hedged-equity strategies often prove lucrative when markets are volatile. These strategies attempt to capture some upside while protecting on the downside, and they can produce attractive returns as the broader equity markets struggle for direction.

Bottom line: Investors can return to more aggressive stances when they see a sustainable shift toward peace in Europe, inflation slows meaningfully and Fed policy becomes more dovish—all of which would provide relief to supply chains, commodity prices and consumers. In the meantime tilt to value stocks, dividend growth, and hedged equities as they are likely to do better than the broader equity markets.