In A Tepid U.S. Economy, Where Do We See Growth Opportunities?
By Juliet Ellis CIO, Invesco US Growth Equities. Posted on Insights: Invesco US Blog.
As the Invesco US Growth Equities team looks into 2018 and observe the weight of the evidence, we think the US equity markets can achieve mid- to high-single-digit price appreciation in 2018 as we continue in the secular bull market that began in March 2009.
We base this view on continued tepid economic growth in the US – we expect real gross domestic product (GDP) to be 2%, driving mid-single-digit earnings growth plus 2% dividend yield. Our conclusion assumes flat margins, slightly lower share count and a flat price-to-earnings (P/E) multiple.
The US economy: A long, but mild, recovery
2009-2017 has been the third-longest economic recovery in US history, but the rate of growth has been 30% lower than the average of the previous 60 years.1 In light of this subdued growth, few excesses have had the opportunity to develop. Therefore, we think slow economic growth could continue over the next two years.
When defining GDP growth in the context of output potential (labor force growth plus productivity gains), 2% real GDP growth would be very consistent with expectations. Demographics will continue to play an influential role in our economic growth rate. Aging baby boomers retiring from the work force are contributing to slower labor force growth year over year. These boomers have higher average wages and higher productivity levels than newer, younger workers. As a result, productivity levels are 30% below historical average trends.2 Neither of these trends is likely to improve significantly until the growth rate of Americans aged 20 to 64 bottoms – which is expected to happen between 2022 and 2024.3
The economic cycle: Timing matters
Over the last 60 years, equity market cycle returns for the S&P 500 Index have been two to three times higher when the economy is in the early acceleration stage versus the mid cycle.4 cMid- to late-cycle returns have averaged between 6% and 9%, in line with what we expect over the next couple of years.4
The biggest risk to this view is a change in leadership at the Federal Reserve that would result in monetary policy tightening too quickly. Higher interest expense would drive corporate earnings growth lower and could drive the economy into a recession by crowding out business’ ability to fund growth through attractive borrowing rates.
In our view, tepid economic growth during this mid-late stage of the cycle creates an ideal set-up for investment in long-term, secular growth themes based on innovation driving market share gains. (Opportunities for cyclical growth are more limited without a reacceleration of leading economic indicators in the US.)
Technology is driving secular growth opportunities
Technology is changing how we do everything. Worldwide access to the smartphone is bringing the consumer closer to the internet anywhere and anytime – global internet penetration is now at 50% and rising rapidly.5 These changes are driving seismic shifts in market share between companies, creating winners and losers, and fostering an excellent environment for bottom-up fundamental research and stock picking.
Here are several examples areas where our US Growth Equities team is finding secular growth opportunities:
- E-Commerce. Only about 10% of US commerce currently happens online,6 but we believe this will grow to 30% or more of total retail. Food and food service, autos and auto parts, furniture, appliances, and luxury goods have yet to see significant online penetration.
- Video game content providers. . US consumers spend 11% of their mobile device time playing video games, compared to 19% reading and posting on Facebook, and 14% watching other entertainment like movies and TV shows.7 The improved graphic processing power of the smartphone and the proliferation of downloadable content is expanding the number of potential gaming devices from more than 400 million (video game consoles and personal computers) to 3.5 billion (smartphones).8
- Health care tech. Big data, super-computing power, robotics, miniaturization and genome mapping are driving innovation in pharmaceuticals, biotechnology and health care devices. For instance, increases in computing power and the application of artificial and machine learning has brought the cost to sequence a single genome down from $100 million in 2001 to less than a $1,000 now, and has driven a 19-fold increase in genomic knowledge over that time period.9 Clinical drug trials that use selection biomarkers for enrolling patients have tripled the odds of a drug progressing from Phase 1 to final approval.9
- Electric vehicles. These vehicles are driving innovation in transportation and battery technology.
- Blockchain. This is a potentially transformative technology that could change how we pay for things, how we authenticate our identity, and how we store and transfer information about asset ownership.
1 Source: Wolfe Research, as of Sept. 25, 2017
2 Source: US Bureau of Labor Statistics. Data from 1988 to September 2017.
3 Sources: Ned Davis Research, Bureau of Labor Statistics, US Census Bureau, as of Dec. 31, 2016
4 Sources: Wolfe Research Portfolio Strategy, Conference Board, Standard & Poor’s, and Bloomberg L.P., as of Dec. 31, 2016. Past performance is not a guarantee of future results.
5 Sources: ITU, Bank of America estimates, Invesco estimates, as of Dec. 31, 2016
6 Source: Bank of America, as of Dec. 31, 2016
7 Sources: Flurry Analytics, comScore, NetMarketShare, as of Dec. 31, 2016
8 Source: Invesco estimate, as of Dec. 31, 2016
9 Source: Kleiner Perkins, as of Dec. 31, 2016
The information provided is for educational purposes only and does not constitute a recommendation of the suitability of any investment strategy for a particular investor. Invesco does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Federal and state tax laws are complex and constantly changing. Investors should always consult their own legal or tax professional for information concerning their individual situation. The opinions expressed are those of the authors, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.
NOT FDIC INSURED
MAY LOSE VALUE
NO BANK GUARANTEE
All data provided by Invesco unless otherwise noted.
Invesco Distributors, Inc. is the US distributor for Invesco Ltd.’s retail products and collective trust funds. Invesco Advisers, Inc. and other affiliated investment advisers mentioned provide investment advisory services and do not sell securities. Invesco Unit Investment Trusts are distributed by the sponsor, Invesco Capital Markets, Inc., and broker-dealers including Invesco Distributors, Inc. Each entity is an indirect, wholly owned subsidiary of Invesco Ltd. PowerShares® is a registered trademark of Invesco Ltd., used by the investment adviser, Invesco PowerShares Capital Management LLC (PowerShares) under license. PowerShares and Invesco Distributors, Inc., ETF distributor, are indirect, wholly owned subsidiaries of Invesco Ltd.
©2017 Invesco Ltd. All rights reserved.