Three reasons why the US equity rotation has further to go – CE

Economists at Capital Economics think that the outlook for the coronavirus, the economy and policy in the US points to a continuation of the rotation currently underway in its stock market, with tech-related industries generally underperforming others, and the growth factor faring worse than the value factor.

See: S&P 500 Index to surge higher to 4100 in the next 12 months – Deutsche Bank

Key quotes 

“We forecast that US economic growth will be exceptionally strong. We are projecting the strongest annual GDP growth since at least the early 1980s, and think that consensus forecasts are still too low. Stronger-than-expected cyclical growth would probably boost the earnings of industries that struggled in the anaemic economic growth and low inflation of the 2010s to a greater extent than those that did relatively well in that period – mostly tech firms whose earnings grew primarily because of structural shifts rather than the economic cycle. Strong, broad-based economic growth might also reduce the price/earnings premium that investors are prepared to pay for fast-growing firms, which surged in the 2010s.”

“The coronavirus crisis has had far larger sectoral effects than might have been expected given the size of the downturn, as virus-related restrictions on many forms of economic activity induced a huge shift online. With some exceptions, those effects are likely to reverse in the coming quarters to a much greater extent than they have done so far, provided mass vaccination allows most normal forms of activity to resume.”

“We are anticipating further increases in long-term interest rates. We expect the yield to climb above 2% this year. Rising yields have at least coincided with some of the industries hit hardest early in the pandemic doing well recently. So, to the extent that changes in yields do matter, they might support the rotation.”