2021 Equity Outlook
We anticipate a good year for equities but a year brimming with questions. The S&P 500 currently trades at 24.2 times forecasted 2021 earnings which is a 45% premium to its 20-year average. This looks quite expensive. However, this historic premium has support from current Fed monetary policy, Washington's spending/stimulus initiatives, and market earnings recovery. In the short-term we view more stimulus as outweighing the prospects of future tax hikes. The short-term effect of these initiatives is excess liquidity in the financial system. This excess liquidity “money printing” has given fuel to Alternative currencies such as Bitcoin and fostered animal spirits in New Economy Growth stocks. The bigger question is whether the “cheap money” will create disruptive inflation. We expect that in the longer-term inflation will become an issue for financial markets and continue to devalue the US dollar.
We are presently concerned with the valuations in the Growth segment of the stock market. We have not forsaken growth stocks, and we will maintain significant exposure to Growth stocks, but we are trimming the froth of these assets in our portfolios. Relative outperformance of large cap growth stocks since 2014 has been sensational. In 2020 alone Large Growth stocks bested Value stocks by 39% which is the largest annual outperformance on record. The Large Cap Growth side of the market is currently trading at 45.2 times earnings. As noted above, investor expectations and animal spirits are extremely high for new economy growth stocks including IPOs. We see much better valuations and expectations in the Value, cyclical, small caps, and International equities categories. In addition to the extreme valuation differentials, we have the green shoots of an economic recovery which historically favors Cyclical/value sectors. To add additional weight to this argument, 2021 EPS growth for Industrial stocks is expected to be 75.5%, for Materials 31.3%, International stocks 40.8%, Small cap stocks 76.6%. Contrast this to expected EPS growth of 13.9% for Technology.
It is our approach to create and manage portfolios that are unique to our clients and their circumstances. We suggest investing in diversified portfolios such as stocks, bonds, commodities, and cash. The proportion of these assets should be based on client’s unique circumstances, goals, and risk tolerance.
Economic Outlook
U.S. GDP Growth Expectation is 5.0% for 2021 and we believe there may be upside to consensus.
Core Consumer Price Inflation (CPI) is forecasted to firm at 2.2% in 2021.
Fed Fund rates are expected to avg. 0.0% for 2021.
Unemployment to hit 5.3% at the end of 2021.
Ten Year Treasury yield to hit 2% by end of Q2.
Risks to Market Forecasts
Coronavirus: New strains not treated by current vaccines.
Vaccine: A rollout that falls significantly behind targets for the most vulnerable.
Inflation Surprises: In our opinion this could significantly impact markets to the downside. Inflation typically causes stock multiplies to contract. As we have written above stock multiples are at multi-decade premiums. The Fed would be forced into raising rates to combat runaway inflation.
MMT: The longer-term negative consequences of a Modern Monetary Theory approach to financial markets.
Market Projections
We are forecasting a 12-month price target on the S&P 500 of 4,200 to 4,600. This represents a return of 12% on the low side of our range for U.S. Equities.
Current consensus has S&P 500 earnings per share growing by 20.4% in 2021.
We believe we will see a continued rotation out of Growth areas to the cyclical and value names consistent with an early economic expansion. These categories include Value, cyclical, small cap stocks and international equity.
At the sector level we are looking to position more in economically sensitive stocks such as Industrials, Materials, and financial sectors.
We expect inflation to firm in 2021. We are watching this metric for any unexpected increases to the inflation target.
Biden Administration Near Term Policy Priorities
A $1.9 trillion COVID-19 relief package. Already announced.
A ~$2.0 trillion infrastructure proposal. This will fall short of “The Green New Deal,” but we expect the infrastructure bill to have green elements while focusing more on roads, bridges, airports etc.
Tax Increase for corporations and individuals. We expect tax increases on both individuals making more than 400K per year and corporate tax increase from 21% to 28%. We believe the tax legislation will be a priority in 2022.
Sources: S&P Global, JP Morgan, CFRA, Barrons, Morningstar, Kiplinger, Ned Davis, Vanguard
Securities offered through Arkadios Capital Member FINRA/SIPC. Advisory Services offered through EPG Wealth Management LLC. Certain individuals associated with or employed by EPG Wealth Management LLC may also be registered representatives of Arkadios Capital.
Past performance does not guarantee or is indicative of future results. This summary of statistics, price, and quotes has been obtained from sources believed to be reliable but is not necessarily complete and cannot be guaranteed. All securities may lose value, may not be insured by any federal agency and are subject to availability and price changes. Market risk is a consideration if sold prior to maturity. Information and opinions herein are for general informational use only and subject to change without notice. This material does not constitute an offer to sell, solicitation of an offer to buy, recommendation to buy, or representation as the suitability or appropriateness of any security, financial product or instrument, unless explicitly stated as such