The US equity market has bounced back strongly since the depths of the Covid-19 panic in March last year, with strong stimulus and insatiable demand for ‘stay at home’ technology helping the S&P 500 to almost double in value over the past 16 months.
However, the emergence of the highly transmissible coronavirus Delta variant has increased market volatility in recent weeks, with heightened fears the US economic recovery could derail.
With the S&P 500 hitting a new record high earlier this month, are there still gains to be extracted from the world’s largest equity market over the near term? Below, a number of investment professionals debate this question.
Focus on quality
Mark Finn, portfolio manager of the T. Rowe Price US Large Cap Value Equity Fund
We see the potential for the rally in cyclical stocks to continue, although prevailing valuations and the pattern of past recoveries suggest to us the next leg of any upcycle may favour names with higher‑quality business models. Now is not the time for value investors to forget the lessons of the past decade and a half – when a wave of technological innovation disrupted many traditional industries.
The sharp recovery rally in value stocks lifted all boats during its early phase – even those, like the energy sector, that we believe face significant challenges from disruption. In keeping with our quality bias, we have remained cautious on energy stocks and prefer to find cyclical exposure in other industries.
For example, over the next 3-5 years, demand growth related to online shopping could provide a meaningful tailwind for companies that produce the containerboard used to package products for shipping. We also like the dominant players in the US air freight and logistics industry, as these companies offer exposure to rising e‑commerce shipment volumes, but management teams also have several levers to pull to expand gross margins in the coming years.