Volatility may begin to spike toward the end of November as the December 3 deadline for raising the U.S. debt ceiling may now coincide with the finalization of a potential infrastructure-spending package.
Though it appears as though U.S. corporate tax rate hikes may ultimately be avoided, investors must still assess the expected impacts of potential increases in other U.S. tax rates, including a minimum tax on U.S. companies’ foreign income.
Covid-19 variants, such as the Delta subvariant discovered in the U.K., are likely to continue injecting volatility into global equity markets.
Best Ideas
In the U.S., reflation and expectations for higher yields could bolster returns for small caps, as well as companies with pricing power and reopening tailwinds. Supportive monetary policy and the prospect of stronger relative earnings growth could boost certain stocks in cyclically oriented sectors in developed non-U.S. markets, particularly in Europe and select emerging markets, ex-China. Select growth companies well positioned for reopening, such as front-office software leaders, also look attractive. Our long-term approach tilts toward cyclicals and value stocks exhibiting strong earnings growth and pricing power.
In Focus: Broader Tech Leadership
It’s no secret that growth and technology stocks have benefited tremendously in recent years from low interest rates and the expansion of the digital economy. That growth accelerated almost exponentially in 2020 thanks to the economic impacts of Covid-19. Even mature industries that have lagged the broader tech sector have done well: PCs, for instance, experienced their highest U.S. growth rate in 20 years.
Notably, while the sector has appreciated significantly as a whole, leadership within the sector over the past five years has narrowed considerably. In fact, the vast majority of growth over the time period came from the five largest names in the S&P 500, which now make up approximately 25% of index. Their combined market capitalization exploded nearly 500% since the end of 2016, from $2.0 trillion to $9.9 trillion, with more than half of that growth coming since March 2020 alone.
Although we remain structural bulls on the technology sector and believe that mega cap tech companies will remain dominant in their respective arenas over the long term, these areas face significant headwinds in the current environment. Rising interest rates, higher inflation and slowing growth have already taken a toll on earnings. Should these headwinds persist, the remarkable pace of outperformance by mega cap names will likely prove unsustainable over the near term. As a result, we have become more selective toward technology stocks and expect a broadening of leadership in the sector to provide investors with attractive opportunities beyond the best-known names.
Saira Malik is head of global equities at Nuveen.