Innovation Equities: Past, Present, and Future | Lord Abbett
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Market View

After considering their strong historical performance, we believe the current environment for innovation equities remains favorable, while long-term opportunities abound.

Read time: 3 minutes

In a recent webinar presentation marking the 10th anniversary of the Lord Abbett Growth Leaders Fund, Thomas O’Halloran, Partner and leader of the firm’s Innovation Growth Equity team, and Brian Foerster, Investment Strategist, explained why they believe innovation investing is well supported in the current environment and discussed how the increasing influence of innovative technologies across numerous sectors will enable new opportunities in the years ahead. Register here for a replay of the event, “Innovation Investing in the Decade Ahead.”

Market Preferences Shift but Earnings Strength Remains Key

Market sentiment changed many times since the onset of the pandemic in 2020. Investors’ preferences alternated between innovative growth companies that were essential to maintaining the economy during most of last year, to value stocks that were anticipated to benefit from a cyclical upswing in economic activity made possible by the rollout of very effective vaccines. Throughout this period, broad stock market averages continued to climb in an environment powered by economic stimulus and historically low interest rates. And we strategically adjusted the investments held in our innovation growth equity portfolios by assessing cyclical as well as secular growth opportunities during this timeframe.

Against the backdrop of shifting investment market sentiment, innovation equities have continued to perform well. Growth companies continued to produce strong earnings amid the throws of the pandemic along with an acceleration of some trends such as ecommerce and cloud computing, while value earnings have surged with the cyclical strength of the economic recovery. Notably, growth earnings estimates are expected to show considerable strength through 2021, outside of the depths of the pandemic in 2020 (see Figure 1).

 

Figure 1. Earnings of Growth Equities Continue to Show Strength in 2021
Earnings per share growth in the indicated periods (estimated for 2Q-4Q in 2021)

Source: Russell, Refinitiv, FactSet and Credit Suisse. EPS = earnings per share. EPS is based on net income as reported. The historical data shown are for illustrative purposes only and do not represent any specific portfolio managed by Lord Abbett or any particular investment.  

 

Earnings relative to 2020 have been robust almost across the board, from high-quality companies within innovation, value, and blue chip bellwethers, to lower-quality businesses that have simply avoided bankruptcy and seen their earnings come back off from devastating numbers last year. Going forward, however, we think there likely will be a significant separation between those companies able to sustain a strong level of earnings growth and those that are seeing a peak now and are facing many of the same challenges they confronted before the pandemic. And as we’ve been saying for a few years now, we believe the likely winners should be those innovators able to continue disrupting and taking market share and those durable franchises able to adapt to change.

Near-Term Considerations and the COVID-19 Delta Variant

On a relative basis this year, innovation investing has been in a challenging environment resulting from the distinct market rotation away from higher P/E (price-to-earnings) growth stocks toward economic recovery themes at a time when economic growth has been accelerating, corporate earnings are rising, and optimism abounds. We believe this combination is simply not sustainable. Strong earnings growth potential and the acceleration of the powerful secular trends in innovation that have been under way in recent years should influence a reversion in investment market preference, in our view.

That said, we believe the spread of the COVID-19 Delta variant may dampen near-term economic growth expectations and interest rates, providing a potential backdrop for innovation growth names to regain investment market leadership. As a result, we have increased our exposure to innovation growth over the past month, as the Delta variant has materialized as a market force.

Accelerating Change Provides Potential Long-Term Opportunities

Innovations in technology, biotechnology, and e-commerce are accelerating as the power of computational capacity, such as artificial intelligence, exponentially increases. We believe we have entered an age of innovation where many of the products and services that are available now will become a fulcrum for innovations in the future, much the way mobile devices contributed to the development of e-commerce and genomics research contributed to the development of the COVID-19 vaccines.

 

Figure 2. Growth Investing in the Age of Innovation
Areas of accelerating innovation span corporate and consumer landscapes

Source: Lord Abbett. The information shown are for illustrative purposes only and do not represent any specific portfolio managed by Lord Abbett or any particular investment.

 

The pandemic placed many innovative products and services that we have focused on for the last 10 years on center stage, reinforcing the need to continually develop new technologies for a reimagined future. We believe these dynamics will drive potential investment opportunities in the next 10 years—and beyond.

 

Unless otherwise noted, all discussions are based on U.S. markets and U.S. monetary and fiscal policies.

Asset allocation or diversification does not guarantee a profit or protect against loss in declining markets.

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Glossary Definitions

Price-to-earnings (P/E) Ratio is a valuation ratio of a company's current share price compared to its per-share earnings.

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

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