During the course of 2021, Morgan Stanley’s equity strategist said that he expects a tug of war between earnings expectations and a multiple that compresses a little bit.
Stock market indices might have broadly priced in a lot of the upside at the index level with earnings expectations now sitting well above prior highs, but there could still be an upside surprise in select sectors, said a US equity strategist. Adam Virgadamo, US Equity and Thematic Strategist, said in a conversation with Ellen Zentner, Morgan Stanley’s Chief US Economist, that he sees the potential for positive surprises in sectors like Banks and consumer finance, personnel services, advertising, food distribution, and enterprise technology.
Wall Street in for a tug of war in 2021
During the course of 2021, Morgan Stanley’s equity strategist said that he expects a tug of war between earnings expectations that continue to move higher, albeit at a slower pace with the reopening is underway, and a multiple that compresses a little bit. “On net we still see a marginal upside to equity indices over the course of the year, but we think that’s likely to be in a tug of war type fashion or with some back and forth over the course of the year,” he added.
Talking sector-specific, Adam Virgadamo said that in the banks and consumer finance, personnel services, pockets of the energy complex, advertising, particularly outdoor advertising, off-price retailers, food distribution, and enterprise technology are among the more target-rich environments that result carry potential for upside surprises. On the flip side, home entertainment, Internet services and anything related to the stay-at-home trend is where he thinks investors need to be selective.
However, the E-commerce space that also boomed during the pandemic is where Virgadamo expects gains to be retained. “There was increased digitization of consumer wallets, increased digitization of buying patterns. And while we certainly expect stores to reopen and consumers to return, longer-term we do think that accelerated the adoption curve for e-commerce,” he said.
What’s the stimulus doing for US economy
On the economic front, Ellen Zentner said that the fresh round of stimulus cheques is expected to be spent by the recipients in about 10-days time. Zentner said that the stimulus is being spent like regular income with uncertainty about future finances looming large. “They’re actually spending them as though it’s like a paycheck. And so you’ve just got a tremendous boost to spending again in late March, going into early April. And so what we’re doing with this stimulus is building that bridge into the middle of the year when we’ve got jobs coming back, hand over fist,” she said.
US households have also gone on to save the early rounds of stimulus during the lockdown phase. This has now resulted in the US hitting 20% savings rates in the first quarter. Zentner added that there is roughly over $2 trillion in excess savings now. “And even if a small portion of that makes its way into the economy, that’s just an incredible amount of consumer buying power at a time when the economy is reopening, when we still have tremendous pent up demand for services in the economy,” the economist said. This huge build-up in saving has turned up inflation expectations in the United States.