December 12, 2020

Executive Summary

We remain positive heading into 2021, with our work suggesting we are in a multi-year bull market, supported by an economy in the early stages of expansion. From depressed levels, the global economy, led by the US and China, is set to show the best growth in a decade, though the path forward will be uneven and highly dependent on the rollout of COVID-19 vaccines.

The first phase of the current bull market, the strongest from a return standpoint, appears to be over. In the next phase, we expect positive but moderating returns, sustained by improved earnings. Several of our studies suggest the potential for 10%-plus equity gains in the year ahead. Elevated investor expectations and vaccine deployment execution are among the primary risks to our outlook, and we expect markets to move in a two steps forward, one step back fashion. Within fixed income, we foresee a modest lift in US yields, a slightly steeper yield curve and continued demand for credit as sectors with rates exceeding inflation dwindle.

Key Takeaways

Economy: A Tale of Two Halves

  • Elevated savings and cash balances provide a cushion awaiting vaccine deployment and leaves economy spring loaded
  • Second half of the year much stronger than the first half
  • We estimate 4.4% US economic growth, the highest since 1999

Equity: Next Phase Begins

  • Strongest stage behind us, but market still has upside
  • Next phase characterized by positive but moderating returns
  • Drivers shifting from P/E expansion to earnings recovery that is underappreciated, and we expect a snapback towards trend

Fixed Income: Higher but Constrained Yields

  • Base case outlook: 10-year US Treasury yield range of 0.50-1.50%; most of the upside occurring in the second half
  • Increased Treasury supply, recovery, and vaccines should encourage slightly higher yields and a steeper yield curve
  • International demand for US fixed income and Federal Reserve purchases to cap major upside yield moves

Key Positioning

  • Overweight equity relative to fixed income and cash
  • Barbell US small cap overweight with large growth
  • Underweight international developed markets, until confirmation of trend change
  • Favor Industrials and Materials paired with Technology and Consumer Discretionary
  • Overweight high yield and investment grade bonds
  • US Dollar to stabilize against developed market currencies

Download the full 2021 Outlook to see detailed information, charts and analysis.