There is a significant discrepancy between the Fed and the market regarding official rates in 2023. The fed has been insisting through speeches and press conferences that the terminal rate for 2023 will be around 5.125%. The market, however, thinks the fed will not be able to maintain rates at that level without tensions in the labor market or stress in credit and equity markets. The rate the market is using to price future cash flows and obtain valuations, is approximately 4.4%. The difference between both is 70 bps, which doesn’t seem much. But when you plug in this difference in the discount rate, the result will provide significant lower valuations.
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Chart Source: Bianco Research
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