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 finalizing 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 and financials, 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 that exhibit strong earnings growth and pricing power.
In Focus: The New Growth Leader? You’re Up, Europe.
Our thesis for the transition of equity leadership from the U.S. remains intact, despite delays caused by the summer surge in the Delta variant. Although slow to start, this shift should gain traction amid accelerated vaccination rates and policy support, as well as the easing of global supply chain disruptions.
Heading into 2022, our optimism for the outperformance of non-U.S. equities, particularly European markets, has only increased. The pro-cyclical nature of the global economic recovery continues to favor Europe, given the composition of its stock market. The MSCI EAFE has higher weightings to industrials, financials and materials, and is underweight information technology relative to the S&P 500.
Additionally, the U.S. economic rebound from the Covid-19 recession quickly shifted from recovery to expansion, resulting in peak earnings growth in the second quarter of 2021, while the delayed recovery in Europe should allow for further earnings expansion in the quarters ahead.
Earnings results for the Stoxx Europe 600 Index in the third quarter rivaled those of the S&P 500 Index in the first quarter, with 68% of constituents surprising to the upside by the end of October, and earnings and revenue growth rates north of 50% and 13%, respectively. As earnings growth across the Atlantic continues to take hold in 2022, and with valuations trading at 15%+ discounts relative to their own history (and to the U.S. market), we see a very attractive entry point for European equities.
Saira Malik is head of global equities at Nuveen.