Risks To Our Outlook
Headline economic data may create pockets of volatility, as inflationary shocks caused by short-term global supply chain disruptions and year-over-year comparisons will be difficult for investors to ignore.
Though recent Fed comments have seemingly settled investors’ nerves, many remain wary about possible rate increases or asset purchase tapering. The central bank’s messaging will remain one of the most significant near-term risks.
With the clock started on the legislative battle for an infrastructure package, investors should expect news related to its progress to move markets.
New Covid cases and varying vaccination rates across the globe could also create volatility for global equity markets. On a related note, incrementally better news out of the U.S., combined with incrementally worse news elsewhere, has led to a recent strengthening of the U.S. dollar. This is likely to create near-term headwinds for emerging markets.
Best Ideas
We see continued tactical opportunities in growth and technology stocks as investors with lofty expectations may be unimpressed by first quarter earnings. In the near term, we continue to favor consumer service sectors, especially in areas where unemployment remains elevated, and we are keeping an eye on industrials that could benefit from publicly funded infrastructure investments. We remain bullish on U.S. small caps, emerging markets and cyclicals for the longer term as the economy reopens, but think those areas could be subject to volatility over the coming months.
In Focus: Lofty Earning Expectations Look Beatable
We’re mindful that the first three months of 2021 were unique in several respects, making it more difficult than normal to predict the quarterly earnings environment. The U.S. economy roared thanks to a combination of fast and effective Covid-19 vaccinations and larger-than-expected fiscal stimulus. As a result, unlike most recent quarters, analysts were actually revising their earnings forecasts higher as the quarter drew to a close.
While that could make expectations harder to beat than normal, we still think positive surprises are in store. Consensus expectations are around $40/share for the first quarter, a 20% increase over last year. But we think profits could come in 5% to 10% higher than that, around $43/share.
The uniformly good U.S. economic news notwithstanding, the last quarter brought its share of challenges for companies. Bad weather temporarily slowed manufacturing activity in February, further clogging supply chains for firms already bracing for sharply higher demand. And companies that depend on overseas revenues may have suffered from the effects of the still-raging pandemic in many areas.
Of course, we don’t expect the first quarter to be the “peak” quarter for earnings growth this year. That will likely come in the second quarter, when the comparisons to the “shutdown spring” of 2020 will be easiest. For the year, we expect the S&P 500 to grow their earnings by 25% to 30% on average, moderately above consensus expectations.
Saira Malik is head of global equities at Nuveen.