The writer is head of asset allocation research at Goldman SachsAt the beginning of 2022, investors faced a very unfavourable starting point for investing — both equities and bonds were expensive, with valuations close to the highest levels in more than 100 years.

At the same time, already elevated inflation accelerated further, forcing central banks to tighten policy aggressively. This triggered a sharp increase in US yields, which weighed on most assets except the dollar and drove a material valuation reset. Equity valuation multiples fell alongside the rising bond yields.

As we enter 2023 investors are facing a different set-up: notably, inflation has peaked and is falling. Historically, this has provided some relief across assets, provided growth remained favourable and a recession was avoided. Equities have also seen a turnround in the Covid-19 crisis recovery, particularly in their relative performance against bonds.