From the Investment Policy & Strategy Group

Earnings Drive Stock Returns in Coming Years

Overall, we see the most significant driver for equities being earnings growth into next year. Productivity gains, employment gains, and reversal of high savings rates will all contribute. Looking ahead over our three-year forecast horizon, it seems that at least the next 1½ years through year-end 2022 will see strong economic growth and earnings—that is a very favorable outlook for potential returns. We expect modest advances in interest rates, with the rate on the U.S. 10-year slowly grinding higher to a range of 1.75% to 2.25% from its recent range of 1.15–1.40%. Corporate balance sheets are generally sound, opening the possibility of continued buybacks and dividends as another source of support for stocks.

Maintain Balance Between Growth and Value

Due to the differences in approach to the pandemic, and the multiple company-specific actions taken or not, we believe stock selection to be an essential component of success and advocate a balance between growth and value exposures. For example, consider this quote from a soda and snacks company: “A lot of the things we did through the pandemic, continuing to invest in the business, are now paying dividends…”

Equities Outside the U.S. Will Have Some Time in the Sun

While most countries are lagging the recovery timeline of the U.S., we anticipate firms globally will see a resurgence of activity, rebounding earnings and stock performance and partially closing a longer-term valuation gap between the U.S. and foreign stocks. This metric, while distorted by the COVID cycle, has historically favored U.S. companies with higher valuations—a trend that is likely to continue, though likely at a smaller gap when non-U.S. economic recoveries begin in earnest. Considering the ample opportunities for great global companies, this recovery convergence and some diversification across different economic cycles makes a modestly sized non-U.S. allocation appealing for U.S. investors.

Small Caps Benefit from De-Globalization & Push for Jobs

In an increasingly global, yet fragmented world, companies seem eager to embrace a more robust and domestic supply chain. This, paired with a push for job recovery, will benefit U.S. domestic firms that comprise small cap stocks. One caveat—there is a wide range of quality within small cap, and we encourage careful, active security selection.

Fixed Income—Protection at a Cost

Fixed income plays a valuable portfolio role in generating income and protecting against decline. This is especially true for portfolios with careful credit selection and modest interest rate risk. However, because fixed income has had such strong performance in recent years, the potential returns are near historic lows. Those lower-than-average returns are tolerable, given the need for portfolio protection and income generation.

Market Monitor

This table provides a comprehensive view of returns across various markets across time. It is paired with a snapshot of economic data, allowing comparison of annualized returns while referencing the coincident economic conditions.

Source: Bloomberg, data is as of 7/31/21.

1U.S. GDP & Unemployment figures are as of 6/30/2021.