S&P 500 continued to recover in the second quarter – the best since 1998 – from its slump in the previous quarter. Nonetheless, economists at Capital Economics expect the long-running outperformance of US equities to come to an end over the next two and a half years.
“The four sectors that fell the least in the slump, and which have generally made up the most, if not all, the ground they lost then, are health care, communication services, information technology and consumer discretionary. The five largest S&P 500 firms, which account for much of its recent strength, are in three of the four sectors. We doubt that their outperformance will unwind much soon. Social distancing measures favour some of their business models. Their strong balance sheets mean they are well positioned to weather a hit to revenues. And Biden beating Sanders to the Democratic nomination has reduced the chances of an anti-trust backlash.”
“Our expectation is that the long-running outperformance of US equities will end over the next 2½ years, as investors’ appetite for risk grows and the US dollar falters. Two potential developments, which are not incorporated into our baseline forecasts, would also reinforce that view. The first is a marked reduction in economic activity resulting from the renewed surge in coronavirus cases in the US. The second is a ‘clean sweep’ for the Democrats in the US elections in November, which is looking more plausible based on the betting markets. This could result in an increase in corporate taxes and some other equity-unfriendly policies.”
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