Quality Growth Boutique

4Q 2020 US Equity Outlook: Navigating Macro Uncertainty With Bottom-up Stock Selection

Outlook

CIO Matthew Benkendorf discusses the tech sector, valuations and the upcoming elections.


Improvement in economic activity has slowed from summer into fall, and the reopening of businesses has caused an increase in Covid-19 infections. The US is now seeking a balance between economic activity and the number of virus cases.

The top five stocks in the S&P 500 – Apple, Microsoft, Amazon, Google, and Facebook – now comprise 22% of the index, a concentration reminiscent of 2000. Some argue the market caps of these companies are justified by their robust earnings and cash flow, while others see a lot of frothiness in the market. Valuations have moved up in some IT stocks, but the stocks we hold in our portfolios are reasonably valued, attractive, long-term franchises.

Markets have been critical of the Federal Reserve’s inability to increase inflation. Recent action has shown that the Fed is either losing incremental potency with its actions or heading towards no effectiveness at all. Investors should allow for the potential of higher volatility with regard to issues that have been benign in the past. There has been an absence of meaningful or extended fiscal policy action, which could change with an aligned trifecta of control in Congress and the White House.

As bottom-up investors, we are not overly concerned with the outcome of the upcoming US election. Policy swings will not necessarily have a material impact on our portfolio companies. And while parties are different, candidates do not always have drastically different goals. For instance, we think the foreign policy approach to China will be quite similar whatever the administration.

Industries that have been hard hit by the pandemic have yet to recover. While we do own stocks in such sectors that are underappreciated by the market, we remain focused on risk-adjusted opportunities. First and foremost, we look for quality– the best rate of absolute growth – followed by undervalued opportunities at the lowest possible risk.

 

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