2021 Outlook: US Equities

The economic revival should gather steam in 2021, fuelled by the rollout of vaccines and ongoing support from policymakers. This may prompt a market rotation into those cyclical value stocks left behind in 2020.

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.

This year’s turning of the calendar may be the most anticipated and welcomed of any in modern memory. After a fateful year that seemed to pack a decade of market and economic activity into 12 months, we see some key dynamics that may be ripe for rotation in 2021. Yet some constants remain too, including our view that the long-term opportunity in U.S. stocks is compelling.

Economic data continues to support the narrative that COVID-19’s impact on employment and activity levels is more akin to a large-scale natural disaster than a credit crisis or typical business cycle recession. This cannot be overstated as the character of the virus’ impact, combined with positive vaccine developments and ongoing policy support, improves the probability of an eventual V-shaped economic recovery. The recent virus resurgence may weigh on mobility and activity in the near term, but we have a clear picture of the end destination and ultimately greater confidence the economic restart can gather steam in 2021.

Ripe for rotation – a value comeback

Price did not matter for most of 2020, at least not in the conventional sense. Investors weren’t seeking low valuations. Growth stocks supercharged by low interest rates, digitisation, work from home and other pandemic-related trends were continuously bid up and led the market higher. It wasn’t until November, with positive vaccine news and election relief, that value assumed market leadership.

Make no mistake: Long-term growth is important and a big driver of earnings and stock returns. But in the near term, we see an outsized opportunity for value investors. While some growth businesses may be permanently accelerated by COVID-19, for others the 2020 bump was a temporary pull-forward of demand. We’d put software and e-commerce in the former category and select consumer electronics in the latter.

Cyclical value stocks, those with ties to economic growth and low valuations, have been most depressed and should enjoy a larger bounce as economic activity improves. Corporate earnings comparisons also could matter more in 2021. Many value cyclicals will have an easier time beating dismal 2020 figures versus growth companies with a much higher bar to pass to impress investors. Then there are buybacks, which slowed dramatically in 2020 and should resume in 2021. Buybacks are more accretive for value stocks, as buying shares at lower valuations (removing them from the market) has a greater proportionate impact on the value of the remaining shares.

Ripe for rotation – cash in motion

Many corporates and households stockpiled cash in 2020 amid extraordinary uncertainty. Prudence was championed as balance sheets were strengthened, spending budgets were cut, and household savings rates were increased. We believe the setup is ripe for more cash in motion entering 2021, including a market-friendly election outcome and a light at the end of the COVID-19 tunnel.

On the corporate side, greater clarity should give company managements the confidence to release excess cash in the form of dividends, buybacks and opportunistic mergers and acquisitions. On the household side, excess cash could be spent on goods and services (i.e. good for the economy) or invested in risk assets (i.e. potentially good for stocks).

We believe the setup is especially attractive for dividend investing, which fell short in 2020 even as the storyline seemed clear cut: Declining bond yields should have created demand for income-oriented stocks. Dividend cuts arguably scared investors away, but the good news is that S&P 500 dividend cuts peaked in May 2020 and have since stabilised. We expect dividend growth to resume in 2021 and with interest rates around the world set to stay low for longer, equity yield is a compelling source for income. One final tailwind for dividend stocks is that many of the COVID-19 beneficiaries are low-dividend payers. That leaves a gap for dividend growers to fill, even as appetite for these growth engines continues.

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or financial product or to adopt any investment strategy. The opinions expressed are from BlackRock as of January 2021 and may change as subsequent conditions vary.

Tony DeSpirito
BlackRock North American Income Trust plc
Franco Tapia
BlackRock North American Income Trust plc
David Zhao
BlackRock North American Income Trust plc