2021 Equities Outlook: Why the US Equity rally could well continue

2020 will be a year that no investor will ever forget. In just 22 trading days, the S&P 500 fell over 30% from its record highs in February - the fastest drop of this magnitude in history. As stocks began their recovery, no sooner had questions been asked as to whether we would retest the lows had stocks then recovered all of their losses by June and are now set to end the year up over 15%.

So where do stocks go from here? Although there are risks to the overall market amidst lofty stock valuations and increasing Covid cases, I do believe, like many strategists across Wall Street, that we will see another strong year for US equities.

The backdrop for stocks going into next year looks to be supportive on many fronts. We should see a continued economic economy leading to improving corporate profits, as well as an increase in supportive stimulus which looks set to keep interest rates low.

Add to this that the political uncertainty around the election has not only abated, but with Trump no longer at the helm, overall domestic political volatility should subside together with an improving outlook for global trade relations. The continuation of a weakening dollar will also help US exporters as their products become more competitive internationally as well as making it more profitable for them to convert their foreign earnings back into dollars. Take all these together, and you have a Goldilocks scenario for US stocks.

Not all stocks are created equal of course and investors should be selective when looking at their portfolios for this year. I reckon we could be set to see a broadening out of performance, as opposed to the technology-oriented rally which has led most of the market's gains in 2020. Stay at home names such as Zoom, Netflix, Peloton and Amazon have been the stock market winners of this year, but as the economy reopens and vaccinations continue to be rolled out, there is likely to be a lot of pent-up demand within other sectors including financials, industrials and retailers - whose stocks are all significantly cheaper. However, this shift to the beaten-up stocks is unlikely to take long next year - the markets are forward-looking don't forget - so the upside in stocks within these sectors could well occur within the first and second quarters of 2021.

There do of course remain risks to equities which could lead to a weaker than expected performance from the asset class, namely Covid cases continuing to accelerate and spiralling further out of control, together with equity valuations being historically expensive and halting further inflows from investors. However, when comparing the historical valuation of the market with interest rates, David Kostin, Chief US Equity Strategist at Goldman Sachs points out that "the stock market is somewhat attractively valued."

There is also the argument that given the smaller weighting within the index of the cyclical, economically sensitive stocks, even if they do rally, their impact on the overall market is significantly more muted than the performance of big tech (the FAANG names now make up about 25% of the index). However, although big tech stocks may underperform those beaten-up sectors of 2020 in the next 12 months, the sector still looks well positioned for positive performance over the year.

In short, the winners of 2020 may not be the winners of 2021, but they shouldn't prevent many of this year's laggards propelling the S&P 500 to close the year over 4,000 from its current 3,700 level.

There is great hope that 2021 will be a much better year than 2020, and I believe equity investors are right to not only be hoping, but also expecting that the US economy will continue to recover. Despite my agreement with the majority of Wall Street however, if these hopes are found to be misplaced, there is potential that stocks could have a significantly tougher time than expected.