9. Joe Biden became even more favored to win the White House in the past week. Betting markets are also starting to believe the Senate will flip to the Democrats. According to the research group Cornerstone Macro, the Biden agenda would impose $3.5 trillion in net new costs on businesses and investors by increasing the corporate tax rate from 21% to 28% and taxing capital gains and dividends at ordinary rates for high-income Americans.

10. The equity-risk premium increased this year, but heightened policy uncertainty will continue, likely resulting in little price movement for stocks over the summer. Civil unrest is rising, Korea is heating up and China and India are increasingly at odds. Investors largely ignored these factors when financial liquidity was quickly expanding. While liquidity should remain plentiful, it will begin to decelerate. Eventually, the level of political risk will be harder to overlook and obstacles to a continued market rally would increase.

Improved Economic Indicators Buoy Sentiment, But Patience Is Warranted
Equity markets have started to churn after a near non-stop advance since March 23. Unprecedented central bank policies are directly benefiting credit markets with massive economic and financial asset support. Improvement in most economic indicators has buoyed investor sentiment, even if activity levels remain low. However, on the downside, the economic reopening is triggering more infections in some localized areas. Politicians still generally favor pushing ahead, so a return to widespread and lasting lockdowns is very unlikely.

Nevertheless, a return to normal economic activity and behavior does not yet seem imminent. While economic activity is improving from very low levels, it will take some time to close the gap from depressed levels. Equity markets face a long road back to pre-coronavirus profit levels. Depressed borrowing rates will support stocks, but are insufficient to justify higher prices for expensive stocks without a significant increase in long-term profits.

While prospects are decent for an eventual rotation out of U.S. equities and the U.S. dollar, we don’t yet see the catalyst for better global growth needed to sustain such a move. Despite the U.S. market’s high valuation, it has a less cyclical nature and a better underlying earnings profile than its global counterparts. As such, we suggest maintaining an overweight stance within a global portfolio.

We remain fairly neutral on equities and expect a churning phase or modest correction in the near term, given the sharp rebound in prices and the likelihood that corporate profits will return, although not to record levels any time soon. The keys to sustaining the uptrend in equity prices include steady improvement in employment conditions and confidence in consumer spending. As one would expect, both conditions likely require a vaccine or successful treatment.

Robert C. Doll is senior portfolio manager and chief equity strategist at Nuveen.

1 Source: Bloomberg, Morningstar and FactSet
2 Source: Commerce Department

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