U.S. Equities: Four Developments to Watch in 2021 | Lord Abbett
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Market View

Lord Abbett experts identify the trends that could shape the U.S. equity markets in the coming year—and their implications for investors.

Read time: 4 minutes

Editor’s note: This Market View is excerpted in part from a white paper offering a detailed examination of factors that could influence global equity markets in 2021. We urge you to read or download the full version.

Time to wrap up an eventful (okay, that’s an understatement) 2020 and look ahead to another, perhaps less trying, year. Last week, Market View presented viewpoints from Lord Abbett investment leaders on the macroeconomic picture and prospects for U.S. fixed income in 2021. In this. the second of a three-part investment outlook for 2021, we will focus on four major themes for U.S. equities in the year ahead and their implications for investors. Contributing their insights are Partner & Portfolio Manager Thomas O’Halloran; Managing Director and Portfolio Manager Darnell Azeez; Portfolio Manager Jeffrey Rabinowitz; Investment Strategist Brian Foerster; and Associate Investment Strategist Melanie Coffin.

  1. An Accelerating Technology Revolution

As the global pandemic forced the shutdown of economies around the world, a significant number of companies were able to maintain operations and adapt to the new remote environment. They did so by offering technological advancements that promote digital productivity and conquer distance through innovations in cloud technology, artificial intelligence and virtual empowerment.  These events highlight the power of the technology revolution which has essentially kept the economy moving during the crisis.  Biotechnology and the development of the COVID-19 vaccine also benefitted from the tech revolution through advancements in genomic sciences, underscoring how innovation and adaptability can transform businesses and economies on a global scale.

While we think these trends will continue to lend support to U.S. equity markets in 2021, we are also looking to the years that follow. The longer-term narrative in the U.S. economy is that innovation is marked by formidable, long-lasting trends; we think investors need exposure to those trends in their portfolios. We believe these businesses are poised to win through organic growth and by displacing less agile companies and industries.

  1. Cyclical Stocks and the U.S. Recovery

The global pandemic severely affected economically sensitive stocks.  The vaccine news of November 2020 subsequently produced a rally in these issues based on an expected economic recovery unfolding in 2021.  Cyclical industries such as Financials, Industrials, and Energy could benefit from an easing in the pandemic crisis in 2021, and we believe these stocks may have more upside ahead.  Indeed, these issues could potentially benefit amid the broad recovery in corporate profits that analysts are expecting in 2021, based on earnings forecast revisions (see Figure 1).


Figure 1. Analysts Expect Good News on U.S. Earnings Will Be Front-Loaded in Fiscal 2021
U.S. balance of fiscal 2021 less fiscal 2022 earnings revisions (based on the S&P 500 index), January 1, 1993­–November 10, 2020

Source: J.P. Morgan “The Earnings Landscape,“ Nov. 10, 2020, and Lord Abbett.

Past performance is not a reliable indicator or guarantee of future results. For illustrative purposes only and does not represent any specific portfolio managed by Lord Abbett or any particular investment. Indexes are unmanaged, do not reflect the deduction of fees or expenses, and are not available for direct investment.


That said, which cyclical issues should investors focus on in 2021?  Within the broader cyclical category, there are resilient companies that adjusted to the crisis through cost-cutting initiatives, inventory controls and gains in efficiency.  We have seen a significant improvement in corporate balance sheets during the year (as discussed in the previous Market View) which is also indicative of how certain companies quickly adapted their business in order to be better positioned for the future, beyond the cyclical upswing expected in 2021.

For investors, we would emphasize the concept of durability, as it relates to business models, long-term financial metrics, and corporate management. We think investors should have some exposure to durable companies with solid track records for earnings and revenue growth that are more closely tied to the economic cycle.

  1. The Search for Income in a Low-Rate World

With government bond yields around the world near all-time lows, we think dividend-paying stocks could garner more attention in the year ahead. The COVID-19 crisis prompted an increase in the number of companies that reduced or ceased dividend payments.  Looking ahead to next year, the stronger corporate balance sheets mentioned earlier could prompt companies to boost payouts to shareholders, resulting in better dividend yields in 2021.

More importantly, within our approach we are focusing on those companies that remained income-producing during the crisis and have competitive business models, strong balance sheets and management teams committed to returning money to shareholders. 

For investors seeking income and total return, companies that have consistently grown their dividends have historically provided a relatively attractive risk versus reward profile, with lower volatility than the broad equity market.  Those features may prove appealing to investors seeking a potentially lower-risk way to maintain equity exposure in 2021.

  1. Equity Valuations after the 2020 Rally

In the December 7, 2020, Market View, we addressed investor concerns about whether today’s equity valuations, in the wake of the strong 2020 market advance, have reached seemingly excessive levels as they did during the “dot-com bubble” of two decades ago.  However, when data is used rather than gut feeling, these concerns appear misplaced.

We think there’s no better place to focus than technology, which was the epicenter of the collapse in 2000-02. While valuation multiples within the information technology sector today are modestly higher than that of the overall S&P 500 Index, they are anywhere between one-half to one-third of what we saw in the late 1990s and early 2000s, depending on the methodology used.

For example, on March 10, 2000 (when the Nasdaq Composite Index reached its highest level of the dot-com bubble), the information technology sector’s P/E ratio was 68.6x, more than twice the current P/E ratio of the sector (as of November 23, 2020). Note that that the standard methodology for P/E ratios uses data “harmonization” techniques that limit the impact of extreme outliers. When that technique is eliminated, the weighted average P/E of the tech sector in early 2000 was 153.9x, compared to 45.6x today. The disparity between the weighted average in 2000 and the weighted harmonic average points to numerous stocks with severely extreme valuations within the index.


Figure 2. How Do Today’s Tech Sector Valuations Stack Up against the Peak Levels of the 1999–2000 “Dot-Com” Boom?
Price-to-earnings ratios at March 10, 2000 and November 23, 2020

Source: FactSet. Data compiled November 23, 2020. This chart illustrates the difference in valuations from (1) the date at which tech-sector valuations reached their highest level during the so-called “dot-com” bubble (March 10, 2010) and (2) and a representative reading from today’s market (November 23, 2020).Weighted harmonic average reflects the exclusion of stocks with extreme outlying valuations to more accurately represent sector valuations.

Past performance is not a reliable indicator or guarantee of future results. For illustrative purposes only and does not represent any specific portfolio managed by Lord Abbett or any particular investment. Indexes are unmanaged, do not reflect the deduction of fees or expenses, and are not available for direct investment.


Further, the valuations of today’s technology sector are anchored to actual profitability and operational strength, in our view.  Indeed, unlike the fledgling tech darlings of the 1998-2000 era that offered promising business models and little else, we have seen a sharp, sustained surge in sales that reflects the much healthier environment for key areas of technology that play an important part in the U.S. economy.

Next: Our experts assess prospects for the municipal bond market in 2021.


Webinar: 2021 Investment Outlook
January 7, 2021

Thomas O’Halloran will be among the Lord Abbett experts joining Investment Strategist Tim Paulson in a discussion about fixed income and equity markets in the year ahead, plus thoughts on key economic indicators, global trade, fiscal stimulus and monetary policy, a COVID-19 vaccine and more. Register now!


A Note about Risk: The value of investments in equity securities will fluctuate in response to general economic conditions and to changes in the prospects of particular companies and/or sectors in the economy. While growth stocks are subject to the daily ups and downs of the stock market, their long-term potential as well as their volatility can be substantial. Value investing involves the risk that the market may not recognize that securities are undervalued, and they may not appreciate as anticipated. Smaller companies tend to be more volatile and less liquid than larger companies. Small cap companies may also have more limited product lines, markets, or financial resources and typically experience a higher risk of failure than large cap companies.

No investing strategy can overcome all market volatility or guarantee future results. 

Forecasts and projections are based on current market conditions and are subject to change without notice. Projections should not be considered a guarantee.

This Market View may contain assumptions that are “forward-looking statements,” which are based on certain assumptions of future events. Actual events are difficult to predict and may differ from those assumed. There can be no assurance that forward-looking statements will materialize, or that actual returns or results will not be materially different from those described here.

Statements concerning financial market trends are based on current market conditions, which will fluctuate. There is no guarantee that markets will perform in a similar manner under similar conditions in the future.

Glossary and Index Definitions

Earnings per share (EPS) is a company’s earnings divided by the number of shares outstanding. EPS can also be computed for an index such as the S&P 500.

Price-to-Earnings Ratio: Stock analysts calculate a price-to-earnings ratio by dividing a stock's current price by its earnings per share on a trailing 12-month basis. A forward price-to-earnings ratio is calculated by dividing a stock's current price by estimated future earnings per share.

The S&P 500® Index is widely regarded as the standard for measuring large cap U.S. stock market performance and includes a representative sample of leading companies in leading industries.

Indexes are unmanaged, do not reflect the deduction of fees or expenses, and are not available for direct investment.

The information provided herein is not directed at any investor or category of investors and is provided solely as general information about our products and services and to otherwise provide general investment education.  No information contained herein should be regarded as a suggestion to engage in or refrain from any investment-related course of action as Lord, Abbett & Co LLC (and its affiliates, “Lord Abbett”) is not undertaking to provide impartial investment advice, act as an impartial adviser, or give advice in a fiduciary capacity with respect to the materials presented herein.   If you are an individual retirement investor, contact your financial advisor or other non-Lord Abbett fiduciary about whether any given investment idea, strategy, product, or service described herein may be appropriate for your circumstances.

The opinions in this Market View are as of the date of publication, are subject to change based on subsequent developments, and may not reflect the views of the firm as a whole. The material is not intended to be relied upon as a forecast, research, or investment advice, is not a recommendation or offer to buy or sell any securities or to adopt any investment strategy, and is not intended to predict or depict the performance of any investment. Readers should not assume that investments in companies, securities, sectors, and/or markets described were or will be profitable. Investing involves risk, including possible loss of principal. This document is prepared based on the information Lord Abbett deems reliable; however, Lord Abbett does not warrant the accuracy and completeness of the information. Investors should consult with a financial advisor prior to making an investment decision.


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