Three bullish megatrends for stocks to watch in the years ahead – Morgan Stanley

For investors, the question is not always what it means for the stock market next week, next month or even next year, but what are the implications over the next two to three years? Increased consumer spending, an expanding digital economy and an emerging class of millennial investors could power stocks in the years ahead, according to the team at Morgan Stanley Wealth Management.

A Surge in Consumer Spending 

“Perhaps the most immediate driver of both economic growth and stock prices is a continuation of strong consumer spending. The vaccine rollout and resulting reopening of the US economy could also drive further spending on a variety of services, especially from higher-end consumers. Conditions today contrast with 2008 when the housing market was the epicenter of the financial crisis. This time around, most consumers are not dealing with high debt or defaults, and banks remain financially strong and ready to lend to both business and individual borrowers. That could help drive faster economic growth.”

An Expansion of the Digital Economy

Katy Huberty, an equity analyst who covers information-technology hardware, sees early evidence of business-model shifts that anticipate permanent changes in consumer preferences and accelerating trends in e-commerce and e-services. She also sees wider adoption of technologies such as cloud computing, collaboration tools, automation and data analytics. With the pandemic pushing office employees to work from home, the past year saw a sharp 30% increase in corporate spending on tech hardware, and we anticipate higher spending on digital services, as the economy recovers and companies adjust to a ‘new normal’.”

An Emerging Generation of Millennial Investors

“Currently, only 6.5% of Millennials’ assets are in equities, similar to the 6.0% allocation Boomers had at age 40. In subsequent years, the Boomers’ allocation to equities grew to over 25%, implying further stock-market inflows may be in store. While that demographic tailwind is bullish for stocks, we also need to point out that valuations are higher today, with the S&P 500 Index’s forward price-to-earnings ratio of 21 vs. 12 in 1990. Even as demographic-driven equity-market inflows may support an upward trend for stocks, we’re unlikely to see a rerun of the magnitude of gains realized in the 1990s.”