Taking Stock: Q4 2021 Equity Market Outlook

Fundamentals over incidentals. What’s next for U.S. stocks after an impressive showing year-to-date? We encourage equity investors to focus on long-term fundamentals, not daily headlines, as their barometer. As year-end approaches, we see:

  • Compelling value in equities relative to bonds
  • Pent-up demand and pricing power providing support
  • Market risk from the Delta variant as manageable

Market overview and outlook

The summer saw some reversal of the “reflation trade,” a strong uptrend by economically sensitive stocks that kicked off with vaccine announcements last November. Fears centered on the Delta variant and its potential economic impacts. Concerns that earnings, valuations and gross domestic product (GDP) growth are at or near peak levels also weighed heavy.

Company earnings have been stellar, especially among cyclicals, and the key driver of S&P 500 returns this year. Our view: Peaks are inevitable, but they don’t suggest a cycle’s end. We see strong underpinnings for equities in the months ahead, and advocate a focus on quality and stock selection to capture opportunities in those companies with solid underlying fundamentals.

"Starting points matter, so more muted return expectations are sensible at this stage of the market recovery. But we remain constructive on U.S. stocks."

Taking on the skeptics

While daily gyrations and headlines questioning the market’s grit can be sources of consternation, we remain optimistic on the medium-term outlook for U.S. stocks. The key components of an investment thesis ― earnings, fundamentals and valuations ― support a case for continued strength, even as longer-term return expectations should be tempered.