In a recent webinar, PNC Chief Economist Gus Faucher provided an overview of key macroeconomic factors currently influencing the U.S. economy, and Chief Investment Strategist Marc Dizard shared insight into the bank’s outlook for financial markets. Both experts discussed what this may mean for investors and businesses in the second half of the year.


  • The Federal Reserve continues to combat inflation with higher interest rates.
  • PNC economists expect a mild recession starting in late 2023 into 2024.
  • Investors should be careful to evaluate risks and market behavior in the second half of 2023. 

Economic Overview

Chief Economist Gus Faucher set the stage with observations on the macroeconomic landscape, including the latest in the ongoing strategy to battle inflation. He noted that, although the economy is currently doing well in terms of the labor market, with the most recent unemployment rate sitting at 3.6%,[1] the country is still in a high inflation environment. Even though inflation has slowed, it remains higher than the Federal Reserve’s objective of 2%. Inflation is particularly strong for core services (services excluding food and energy), which presents concerns for the Fed not only because this type of inflation tends to be persistent and could remain elevated over the long term, but also because it is driven in large part by wage growth, which is a factor given the current strong labor market.

To combat inflation, the Fed continues to deploy their primary tool of higher interest rates. During the pandemic, the Fed brought down short- and long-term interest rates to support economic growth. While the strategy was successful, the strong economic recovery helped lead to the current elevated levels of inflation. As a result, the Fed has started to reduce its balance sheet and let some long-term securities mature, which has put upward pressure on long-term rates. The Fed has also consistently raised the short-term fed funds rate from nearly 0% in early 2022 up to 5.25-5.5% as of July, which has had the intended effect of weighing on economic activity. 

Faucher noted that, due to the significant rise in interest rates over the last few months, he expects the U.S. economy will experience a mild recession starting in late 2023 or early 2024. He expects this downturn to be mild, however, given that consumer balance sheets are generally in good shape, which means consumers may be less inclined to cut back on spending. Employers in the current tight labor market are likely to be reluctant to lay off workers, which may also contribute to limiting a downturn in consumer spending. Faucher said the fact that the reasonably balanced state of the housing market may also limit the severity of a recession, as low inventory is leading to only mild declines in housing prices and housing starts have begun to stabilize following a downturn in home building.

Faucher expects that, as inflation slows and it becomes apparent the economy is entering into recession, the Fed will start to cut interest rates in early 2024, which will allow for an economic recovery in the middle of 2024. Overall, he expects to see a decline in real GDP of about 0.5-1%, which is a significantly milder than the 4% decline in real GDP during the Great Recession and 10% drop during the COVID-19 pandemic. He also anticipates that the job market is likely to slow later this year, leading to slower wage growth and the unemployment rate reaching close to 5% in late 2024 or early 2025.

Impact for Investors

With the macroeconomic setting in mind, Marc Dizard, chief investment strategist from PNC’s Asset Management Group, provided insight into investment markets and the path forward for investors. He led the discussion by pointing out that, as of June 30, the S&P 500 had climbed over 15% in 2023, and that the top ten names in the S&P 500 represented 32% of the total index. These top ten companies returned about 12.5% in the first half of the year, making up about 75% of the entire index return.

This is significant, Dizard said, because healthier market conditions typically mean that a broader set of companies participate in the move higher, as a result of the broader economy moving forward and enabling more companies to grow their earnings. The fact that a narrow subset of companies is driving the majority of the S&P 500 and equity returns is not necessarily an indication of an unhealthy market, but it does raise concerns when looking at that one factor.

Dizard also highlighted that large-cap stocks (shares of larger companies) have handily outpaced small-cap stocks (shares of smaller companies) in the financial markets so far this year. This could be the result of investors anticipating a potential upcoming contraction in the economy, as companies with smaller capitalization typically have higher debt loads and can be more susceptible to economic downturns.

Although investor expectations can be a way to gauge the underlying health of market behavior, investor sentiment can also be a contrary indicator. Dizard pointed out bull market sentiment is currently high, meaning that investors are expecting markets to move higher from here rather than lower, despite expectations of a mild recession. This mirrors similar past contradictions, such as bull market indicators around December 2021 that preceded a poor market performance in 2022, and a bear market trough ahead of a strong rally in March 2020. Dizard emphasized that, while bull and bear indicators are not a prediction of what lies ahead, it is an interesting market observation when combined with the large and small capitalization rotation and narrow market leadership.

In terms of market behavior, as the Fed plans to continue with monetary tightening, investors should expect a higher for longer interest rate policy. Increased rates will influence companies’ decisions on what to do with their earnings, and consumers are likely to feel some strain as well, which means the market should pay attention to what the higher for longer policy actually means for investors. In the bond market, increased interest rates have led to an inverted yield curve, which is contributing to expectations of an economic contraction.

Earnings are an important factor for investors to consider in the second half of the year, as an earnings recession may already be underway, with expectations of a negative 7% growth rate in the third quarter of 2023. Rather than just look at earnings figures, according to Dizard, investors should try to understand any guidance companies are receiving looking into next quarter and into 2024, as interest rate pressures may affect their spending.

Ultimately, Dizard said, in his estimation, investors are pricing out some risks, mainly inflation, and not pricing positives of economic growth or earnings. While it’s possible to realize positive returns throughout the second half of the year, investors should exercise caution, making sure they are not in overextended areas of the market that are being driven by narrow leadership, and anticipating and taking all risk factors into account.

Ready to Help

PNC can deliver unbiased, customized, and consultative financial strategies and investment solutions. Click here or contact your relationship manager to learn more.