In the United States, the Covid-19 Delta variant is continuing to wreak havoc, causing concern that the recovery could be derailed. However, there are reasons to be optimistic about the US equity market, with companies having posted exceptional earnings over the second quarter. Looking ahead, a focus on long-term, sustainable, quality, growth companies is the right approach to capture returns.
There have always been multiple forces affecting market sentiment, and today’s markets seem particularly fraught. Covid-19 has been impacting lives for nearly two years and epidemiologists claim it will be around for much longer. The Delta variant has forced businesses to push back return-to-office protocols to January 2022 at the earliest. In Asia, outbreaks have closed some ports, Vietnam suspended manufacturing, and Japan extended its lockdown protocols.
This delayed return to a more normalised environment has huge repercussions, both positive and negative, for a multitude of sectors, including technology, restaurants, hospitality, business travel, industrials, housing, retail, e-commerce and consumer staples.
Wage pressure in particular has become a consistent theme, with many companies forced to increase wages to get the right workers. There are currently over 10 million job vacancies in the US – the highest level ever – and over one million more jobs than unemployed people.
Companies can afford to pay more
However, generous Federal unemployment benefits recently expired and there is little support for states to pony up for replacements. That means the unemployed will need to find meaningful work or the economy risks seeing less spending. Furthermore, companies which want to hire again can afford to pay more: corporate profits in the second quarter were, by all measures, exceptional, with almost all companies in the S&P 500 beating Wall Street earnings estimates. Productivity is quite strong and it is unlikely that higher interest rates are going to stop corporations from spending or investing, nor consumers from spending.
Nevertheless, with inflation becoming a concern as it gradually rises from a low base, and Covid adding uncertainty, it is crucial to identify companies’ strong competitive advantages and pricing power so that they are not only able protect their profit margins but can also continue to expand.
The disruptive power of technology
High-quality companies tend to do well in uncertain environments. The focus should be on finding companies that will grow, regardless of the economic cycle, and benefit from long-term, organic, defensible forces like the shift from cash to electronic payments, from in-store to online shopping, from young to ageing populations, and from insourcing to outsourcing. Regardless of whether consumers or workers are at home or in the office, these investments should bear fruit.
The disruptive power of technology will continue to spur shifts in market share within industries, as well as shifts in market capitalisations among companies. Over time, it will pave the way for new market leadership. Anticipating who the major long-term winners could be means imagining how different an industry or consumer experience might be if these shifts, especially in terms of technological advancement, were to progress at an accelerated pace. As such, an active investment approach focused on long-term, sustainable, quality growth companies, is the best way to capture future returns.
