Weekly Market Update Highlights
• The Fed remained consistently dovish in its messaging on tapering and rate hikes. Guidance, however, left the door open for rate lift-off in late 2022 (or possibly sooner).

• Payroll gains in October and upward adjustments for prior months are likely the beginning of a long-awaited trend. We are keeping an eye on wage inflation and labor force participation rates.

• Overall, dovish central banks, fading chances for corporate tax increases and economic data pointing to a reaccelerating growth should allow equities to appreciate into year-end.

Central banks around the world largely reinforced a slower transition away from historically accommodative policies, which supported global equity markets last week. The S&P 500 gained 2.0%, locking in its fifth consecutive weekly gain. The tech-heavy NASDAQ and DJIA added 3.1% and 1.4%, respectively. Outside the U.S., the MSCI EAFE and ACWI ex USA indexes each gained over 1%, while the MSCI EM Index was mostly flat, weighed down once again by losses in Chinese equities.

Market Drivers And Risks
• The Fed largely met expectations in announcing a winding down of asset purchases ($15 billion per month in November and December) and restating its intention to leave rates unchanged until early 2023.
• Although Chair Jerome Powell’s dovish tone supported equity markets on Wednesday, investors remain highly skeptical of the central bank’s ability to avoid a premature rate lift-off in the face of reaccelerating economic growth and inflation that is appearing more than transient. A late-week rally in Treasury markets led to a further flattening of the yield curve – a sign that investors fear growth may be derailed by rates moving too high, too soon.

• Headline labor market improvements were “just right,” as the U.S. added 531k jobs, over 100k more than expected. However, a drearier story lies beneath the 4.6% unemployment rate, as labor force participation remains stubbornly low.
• With the expiration of enhanced unemployment benefits for roughly 9 million Americans and job openings totaling more than 10 million, we expect participation rates and job growth to increase from here. How quickly they improve remains to be seen. A moderate pace would be ideal for equity markets, as it would allow the Fed to “stay the course.” However, rapidly accelerating job growth could indicate an overheating economy, forcing the Fed to act. A sluggish rate might lead to wage inflation, which could drag on future earnings growth.

• The landscape is shifting for pandemic “winners” and “losers,” as the overhang of the Delta variant dissipates and confidence builds for an end to the pandemic.
• The “winners” of the prevailing at-home environment (e.g., producers of workout equipment and personal electronics) that began in 2020 continued to benefit from historically healthy consumer profiles and robust demand in 2021. That said, consumer preferences have rapidly shifted from goods to services as the effects of government stimulus and Covid-19 abate. Going forward, while the “losers” should benefit from rebounding trends and relatively easier historical comparisons, we will be more selective by identifying companies that (a) chose to prudently reinvest pandemic-driven gains and (b) have sustainable business models capable of structural growth beyond the pandemic era.

Economic Week In Review
• A pullback in the 10-year U.S. Treasury yield lead to relative outperformance for growth and technology stocks. Consumer discretionary (+5.0%) and information technology (+3.4%) added the most, aided by gains in autos and semiconductors. Financials and health care each fell 0.6%. From a style perspective, the Russell 1000 Growth outperformed its value counterpart by 1.0%. Small cap stocks handily beat large caps, fueled by hopes for an end to the pandemic in the U.S. and reaccelerating growth.

• The S&P 500 wrapped its fifth consecutive weekly gain thanks to strong earnings reports, accommodative policy and favorable economic data. Additionally, fading concerns of sharp corporate or individual tax rate increases, and glimmers of hope for easing global supply chain disruptions, allowed U.S. broad-based indexes to reach record highs.

Risks To Our Outlook
The Fed will be under intense scrutiny as it tiptoes toward contractionary policies. With markets so accustomed to quantitative easing and low rates, volatility is likely to rise as investors grow leery of a possible misstep in timing or magnitude.

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.