As the US recovery gains momentum, Franklin Equity Group’s Grant Bowers explains why pent-up consumer demand should present a fertile environment for stocks and highlights some opportunities he sees in the US equity market.
The US recovery is gaining momentum as the country reopens parts of its economy—boosted by government stimulus and vaccine rollouts. Reopening is ultimately leading to better-than-expected earnings growth across the broader equity market. First-quarter company earnings in the S&P 500 Index recently surpassed estimates by 22.5% in aggregate, as 86% of the 95% of companies which have already reported (as of May 21, 2021) topped projections.1
While we believe much of the positive news over the last six months is priced in, we still think upside can be found in companies with attractive long-term earnings growth. As the economy continues to recover, not every company will see the same level of appreciation, resulting in a fragmented equity market of winners and losers. Recently we have seen some shifts in market leadership toward value-oriented and cyclical names, as we near the end of the pandemic and growth and inflation rates are rising. We believe this near-term volatility is creating opportunities in a number of areas which we previously thought were fully valued, but are now trading at more compelling valuations.
Worst May Be Over for Epicenter Stocks
The impact of the global pandemic opened up new opportunities for equity investors. Last year, we saw COVID-19 accelerate and support the growing trends of e-commerce and online learning and entertainment. Many technology names benefited from the global pandemic and we expect they continue to do so. On the other hand, we are seeing an upturn in what we call “epicenter stocks”—companies which underperformed dramatically as the pandemic forced changes in our work, travel and social behaviors. Epicenter stock prices have recovered to some extent in recent months, but we still see opportunity for improving growth in the consumer space as pandemic restrictions are lifted, benefitting restaurants, travel and consumer-oriented technology companies.
Some of this growth will be driven by pent-up consumer demand, coupled with high savings rates. We think pent-up consumer demand is going to be a huge growth driver—as of March 2021, the US personal saving rate stood at 27.6%, a huge increase from 8.3% in March of last year.2 Consumers simply haven’t been spending any money. We expect consumers to seek out products offered by the retail sector as well as activities and experiences. We would also expect many digital behaviors pursued during the pandemic—like remote work or a hybrid office/home model—to continue long after the economy fully reopens.