Staying overweight equities

Written by Frank Murray

22 March 2021

In this week’s Market Pulse, Senior Research Analyst Frank Murray discusses the highlights from last week’s Fed meeting and expectations that equity markets will continue to trend higher.

  • Markets are balancing optimism for strong economic growth on reopening and recovery from the pandemic against a more accommodative US Federal Reserve and rising bond yields. There is some near-term concern about renewed/extended lockdowns, particularly in Europe, but this seems more of a timing issue than trend.  Early indications of consumer services demand are positive in regions further advanced in reopening.
  • The Federal Reserve’s FOMC meeting last week highlighted the new flexible average inflation targeting regime means the Fed will be waiting to see actual data rather than forecasts before making policy moves. 
  • With better growth forecasts behind bond yields moving up, we expect equity markets will continue to trend higher. More economically sensitive equity sectors and regions have been responding to the better growth forecasts and reopening, while higher valued sectors, e.g. IT have underperformed due to rising bond yields. The gear shifting within markets is likely to continue, albeit at a slower pace as the recovery advances.  Overall valuation multiples are more likely to contract than expand, but strong earnings growth should drive equity returns.
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