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: War? What war? Why KKR is sticking to its S&P 500 target issued ahead of the invasion of Ukraine

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It might seem obvious that Russia’s invasion of Ukraine, and the ensuing sanctions triggered by the West, would make stocks less valuable.

But not in the eyes of private-equity giant KKR, in its latest market update.

To be sure, strategists led by Henry McVey, head of global macro and asset allocation, did lower their estimates of U.S. and eurozone economic growth, and did increase their expectations on inflation.

In the U.S., they lowered their 2022 GDP forecast to a below consensus 3.2% from 3.6%, and see 2023 growth slowing to an also-below consensus 1.8%. KKR sees 7% inflation in the U.S. in 2022, followed by 3% next year.

But their S&P 500
SPX,
-1.23%

target was kept at 4,750 for 2022, rising to 4,840 next year. The S&P 500 ended Wednesday at 4,456, just below its 200-day moving average for a decline of 7% on the year.

The tech-heavy Nasdaq Composite
COMP,
-1.32%

has dropped 11% in 2022.

The KKR team say the impact of the war is consistent with what they have been thinking for some time. “We continue to expect more muted returns at this point in the cycle, particularly amidst tighter financial conditions, decelerating growth and stubbornly high energy prices. Importantly, in aggregate for the S&P 500, we expect higher wages to persist — if not intensify — in coming years,” they said.

Equities, they continue, represent good but not great value at current levels. “Equities, in particular, are a good inflation hedge, and companies with high cash flow conversion and rising dividend yields should outperform in the environment we envision,” they say.

They say that more than 96% of CPI inputs are above the Fed’s 2% long-run inflation target. The key in the stock market will be which companies are price makers, and not takers, in 2023 and beyond.

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