S&P 500 Index: Growing headwind to valuations for expensive mega-cap tech stocks – Morgan Stanley

The first week of 2021 was shockingly tumultuous in Washington, D.C., yet key indices reached new highs, with the S&P 500 Index breaking through 3800. The latest surge seems tied to the sweep by Democrats of the two Georgia Senate seats, as well as a formal resolution of the outcome of the November US presidential election. Although markets usually prefer gridlock, that doesn’t seem to be the case this time around. Three main takeaways for investors from the final election outcome help explain why, Lisa Shalett, Chief Investment Officer, Wealth Management at Morgan Stanley, reports.

Key quotes

“Higher taxes or a major increase in regulation, both trends that usually upset markets, are unlikely in the near term. Instead, we think that the new administration will be laser-focused on ending the pandemic, including speeding vaccine rollout and economic recovery. Razor-thin majorities in the Senate and the House suggest legislative agendas will lean toward more centrist proposals, at least until the 2022 midterm elections.”

“More stimulus is likely and, this time could include additional aid to struggling states, small businesses and the unemployed, as well as a speedier vaccine rollout.”

“We expect not only faster growth but rising inflation and a weaker dollar, which should accelerate the rotation from expensive mega-cap tech stocks toward cyclicals and small and mid-cap equities. As the new cycle progresses, deciding how much to tilt from growth toward value and from defensives toward cyclicals will pose challenges for investors.”

“We recommend selectively adding to cyclical stocks with good valuation support in such sectors as financials, industrials, materials, energy, commodities, infrastructure, transports, and consumer durables and discretionary.”