Midyear market review: What’s ahead for equities?Recent market analysis from Ameriprise Financial global-market strategies Anthony Saglimbene looks ahead from 2020 reopening trends. Reprinted with permission. Visit ameriprise.com to learn more
June 15, 2021 – Global stocks sit at a crossroad heading into the second half of the year. This is because equity prices have moved higher through most of the first half as a result of several key factors:
- Surges of economic activity across the globe
- Acceleration of vaccination rates in developed markets
- A fade of pandemic effects in the United States
- Robust corporate profit growth
- Strong confidence levels across businesses, consumers and investors
- Easy monetary and fiscal conditions
- Historically low interest rates
Leaders Include Energy, Financials, Industrials and Materials
Notably, market tone has moved beyond the growth/momentum drivers that carried stocks higher last year. Cyclical value stocks in the Energy, Financials, Industrials and Materials sectors remain the clear market leaders in 2021. These areas have benefited from a resurgence in business activity as a result of global reopening trends.
While performance across broader stock indexes has cooled since mid-April, small-cap stocks are leading U.S. benchmarks higher through the first six months of the year. This includes businesses that benefit from a pickup in domestic growth.
Overseas, stock gains across Europe have accelerated more recently. Increased vaccination rates, solid profit growth and more optimism toward economic recovery have caused stocks to gain ground on the U.S.
While it may be premature, flatter performance in the U.S. and Asia Pacific (excluding Japan) — combined with more robust performance across Europe — could be a sign of added market rotation ahead. Specifically, “out” of areas that have led the pandemic recovery “to” regions that are starting to catch up.
Back at home, the COVID-19 stimulus relief Congress passed in early March helped fuel added spending in the first half. Retail, hospitality, travel and leisure areas continue to see boosted demand, aided by more of the U.S. population being fully vaccinated against COVID-19. However, the additional stimulus, combined with an already strengthening economy, has fueled increasing concerns about higher interest rates and inflation pressures. We believe most of the ongoing supply disruptions and inflation pressures experienced in the first half could see some reprieve later this year.
For the second half of the year, investors should consider the following:
We believe economic trends in the U.S. and abroad should continue to improve. Along with easy monetary policies, stocks should continue to outperform bonds.
Cyclical value stocks could continue to shine. Strong year-over-year profit growth, improving business trends and reopening momentum provide a very supportive backdrop for continued market leadership.
Market performance in the second half could be driven by how actual data tracks against elevated expectations. Investors broadly understand economic and profit growth is likely to be very robust through the rest of the year. For several months, however, some of the data hasn’t met elevated expectations and has contributed to flatter performance across U.S. stocks. Moving forward, equity prices may be more sensitive to changes in growth expectations as opposed to the underlying data itself (which should remain solid).
Temporary or more permanent higher inflation — we believe this is likely the central variable that could affect stock prices over the coming months. Inflation data that eases due to improved supply conditions and reduced shortages (e.g., across commodity prices, semiconductors and labor) could be greeted with higher stock prices. However, if supply constraints linger and inflation pressures across consumer-facing products/services prove stickier (potentially sapping demand), stocks could face near-term selling pressure. Implications for Federal Reserve policy, corporate profit margins and economic growth are all in the cross-hairs of inflation dynamics.
In our view, investors are better served by maintaining a healthy allocation to equities and recognizing that while near-term conditions could look choppier over the summer months, longer-term conditions favor stocks.