Since mid-March, the stock market rotation has paused. This trend has continued over the past few days. However, economists at Capital Economics think that the stock market rotation trade will resume before long.
Financials and energy have begun to underperform again
“One reason for the reversal of the rotation trade could be the slight pull-back in long-term bond yields, following their surge earlier in the year. Falling yields tend to benefit the tech sector more than others thanks to its effectively higher ‘duration’. By contrast, they tend to hurt financials.”
“Expectations for earnings in coronavirus-vulnerable sectors, such as energy and financials, have continued to be revised up relative to those of coronavirus-resilient sectors, like information technology, based on estimates published by Bloomberg. This is consistent with the idea that vaccines will allow the US economy to reopen over the coming months, favouring the sectors that were initially hit the hardest.”
“We think that vaccines will allow most advanced economies to reopen in the second half of this year, prompting a further recovery in the global economy and further rises in 10-year yields, especially in the US. With this in mind, we think that the rotation trade will resume before long.”
“There seems to be quite a lot of optimism priced in financial markets. Indeed, analysts forecast that the overall earnings per share of firms in the S&P 500 will be 40% higher at the end of 2022 than at the end of 2019.”
“But there is still significant uncertainty about the timing and the pace at which the economy will be allowed to reopen. And given the prospect of a large infrastructure stimulus in the US later this year, we would not be surprised if the economic recovery there proved even more rapid than most analysts expect.”