In the wake of a bruising 2022, investors seem to have decided that “risk on” is where it’s at this year. Case in point: High-beta stocks—those with higher-than-average volatility compared to the overall market—have soared 21.7% year to date versus just 8.6% for the S&P 500 Index (see the chart).
It’s the best annual start for high-beta stocks since 1991—a year that saw these risky shares gain a whopping 59%. It’s also a major about-face, as just two months ago, it was low-volatility stocks that were outperforming and helping investors avoid some of the market’s biggest woes.

High-beta stocks’ recent run-up is fueled by fresh signs that the economy may be healthy enough to avoid the recession many on Wall Street have long been predicting. For example:
- Continued labor market strength. The economy added 517,000 jobs, and the unemployment rate fell to 3.4% last month—its lowest level since May 1969.1
- Better-than-expected corporate profits. Earnings growth has been trending lower, with negative year-over-year growth in the fourth quarter of 2022 for companies in the S&P 500 Index. Despite that, the results have been better than anticipated: In aggregate, companies are reporting earnings that are 1.5% above estimates, as reported by FactSet.
- Lower inflation. On a month-over-month basis, inflation came in at or below expectations from October through December. The Consumer Price Index actually fell by 0.1% month-over-month in December—the first such decline since May 2020.1
The obvious question: Can high-beta stocks keep it going and repeat their early ‘90s results? While it seems that the probability of an economic soft landing has risen, it’s far from a sure thing. As we’ve noted often, the Fed is committed to bringing inflation down to its target level. If that requires more interest rate hikes than investors foresee happening, it could have a cooling effect on some key drivers behind high-beta stocks’ recent outperformance.
Indeed, Fed Chair Powell pointed out this week that taming inflation could require an even sharper rise in rates than projected, which pushed market expectations for rate hikes to near all-time highs.
Overall, we have slightly increased the risk in Horizon’s portfolios while remaining somewhat cautious as we evaluate whether the market may be too sanguine about the future.
