Driving growth with quality controls in uncertain markets

Amid geopolitical tensions, rising interest rates, and persistently high inflation through the first nine months of the year, any investor optimism that existed at the start of 2022 soon gave way to worries about numerous — and growing — economic and investment risks.

Yet despite global market volatility and uncertainty, we believe US growth remains relatively resilient. As we commented recently: “US growth remains consistently high given relative stability, US energy security, high-functioning private and venture capital markets, technology advances, and demographics.”

Using market history as a guide, our outlook for US equities is generally positive, even after the interest-rate hikes enacted by the US Federal Reserve (Fed) and other global central banks in recent months: “Over the past 40 years, the first Fed rate hike of a given cycle has typically resulted in negative S&P 500 returns in the short term — but often followed by a rebound into positive territory within one year¹.”

Figure 1

Sectors defining tomorrow’s world

Many of the industries shaping our lives personally and professionally emanated originally from the US. For example, the rapid, multiyear digital transformation across almost all global sectors is largely a byproduct of the country’s generous spending on research and development (R&D).

Last year, US R&D outlays topped 3% of national GDP (Figure 2) — at the time of writing, the highest on record². And while R&D expenditures by several other nations are comparable, many US companies are now reaping the rewards of decades of forward-thinking investment in this area.

We believe there are many potential winners from this: “These range from pharmaceutical companies with competitive advantages driven by innovation and patents, to data analytics and information services providers that quicken and improve decisions, to social media and entertainment companies that benefit from growing preferences for online connectivity and access.”

Figure 2

We expect three technology-driven trends to dominate the next decade:

• Reliance on e-commerce: Accelerated by COVID-induced economic lockdowns, we believe large swathes of the US population will likely stick with online shopping activity in the coming years, despite the reopening of many physical stores throughout the country. 
• Digital payments to flourish: A combination of online shopping and greater convenience will reduce the use of cash, which still accounts for almost 20% of all payments made in the US³ and over 50% across most of the world⁴. US payments companies and other diversified financials players are increasingly taking market share from traditional banks. Other types of businesses benefiting from this trend include investment managers, broker dealers, and fintech companies. 
• Work-from-home measures here to stay: As many employers instill "hybrid” working models, service providers that can help digitalize conventional brick-and-mortar businesses will stand to gain, such as IT services companies and digital marketing firms.