With the stock market hitting new records despite rising coronavirus cases and patches of weak economic data, 2021 will have to deliver on the good news that is already reflected in prices to keep its gains, according to
Bank of America
strategist Savita Subramanian.
That means the Covid-19 vaccines need to work, and be widely accepted, allowing the world to return to some level of normalcy. Subramanian, BofA’s head of U.S. Equity, Quantitative Strategy and ESG Research, expects 2021 will deliver, but she cautioned in an online briefing that 2021’s stock-market gains may not be as strong as investors have become accustomed to over the past decade.
At the same time, she painted a relatively upbeat picture for corporate earnings. Margins are already back to pre-Covid levels as companies have been adept at managing costs and supply chains. Subramanian expects a 20% rebound in earnings next year.
As the economy recovers, consumer spending will shift away from buying a lot of stuff—whether that meant toilet paper, canned goods or patio furnishings—toward experiences including travel and entertainment, she said.
Capital expenditures could finally see a pickup. Subramanian noted that the average age of equipment is older than it has ever been. The likelihood of improved relationships with trading partners under a Biden administration could give multinational companies firmer ground on which to plan for future investments, she said.
Some of the trends that accelerated during the pandemic, such as more spending on public health, growth in the digital economy as people work more remotely, and a focus on automation and productivity, will leave lasting marks, said Joe Quinlan, head of CIO Market Strategy for the Chief Investment Office for Merrill and Bank of America Private Bank, at the briefing. Technology will account for an increasingly large share of capital spending, Subramanian said.
Automation was a theme that came up often. If companies bring production and plants back to the U.S. as part of an effort to have more control over their supply chains, automation will be one way to keep costs and inflation down, Subramanian noted.
Strategists are closely monitoring whether inflation reappears. In a note earlier this week, BofA strategists noted that “some inflation canaries are starting to chirp,” saying the bank’s analysts are reporting that demand in some industries is strong enough for companies to raise prices, while costs are increasing. That said, the bank expects inflation of 1.8% in 2021 and 2.2% in 2022—in line with the Federal Reserve’s target of 2% inflation over the long term, and far from where rising prices would hurt stocks.
They also expect more volatility. So far in 2020, the
has logged 10 moves of 5% or more, the most in a single year since 2008. Subramanian sees more extreme volatility, but said that brings opportunity. BofA strategists recommend that long-term investors capitalize on pullbacks of 5% of more by selling winning stocks to shift toward dividend payers and sectors with structural growth.
More broadly, the bank’s strategists favor value stocks over growth stocks, small-caps over large-caps, and cyclical stocks over defensive stocks next year. They also see a move toward a more nuanced approach to environmental, social and governance investing that looks deeper at company disclosures.
BofA’s list of stocks to own for next year, based on their broader preferences for the year, as well as investor positioning, earnings outlooks, and other metrics, includes beneficiaries of a return to normalcy like
Hilton Worldwide Holdings
(HLT). The bank also favors neglected value-oriented companies like
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