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Last week was a game changer in global markets. Monday’s announcement from Pfizer and BioNTech of strong results from their late-stage trial for the Covid-19 vaccine surpassed the surge in cases, hospitalizations and deaths caused by the virus.
Investors are increasingly looking beyond the next few months. With more candidate vaccines likely to show positive results in the coming weeks, there is now more certainty that the pandemic will come to an end next year.
When and how the vaccines will be distributed is unknown. So far, these details have little influence on markets that look far beyond the short term. Investors finally see the light at the end of the tunnel and are reacting accordingly.
The airlines, hospitality, finance, energy and retail sectors are among the hardest hit by this pandemic and were the ones to increase the most following the vaccine news. On the other hand, tech stocks that benefited the most from Covid-19 underperformed the broader market last week.
It is debatable whether this rotation will continue or prove temporary in the short term. However, in the longer term, there still appears to be good value in holding cyclical and economy-sensitive stocks. Combining the impact of a vaccine with continued fiscal and monetary support, earnings are likely to grow in double digits in 2021 compared to the tech industry, which will struggle to outperform in 2020.
Another source of headaches for growth stocks is the rising bond yield environment. The higher the bond yield from here, the lower investors will be willing to pay a premium for the growth factor. However, bond yields remain far from their long-term averages and are likely to remain low well into 2021.
While tech companies are underperforming, this doesn’t mean investors should ditch them entirely from their portfolios. They will continue to play an important role in diversification, being one of the most capitalized and least leveraged sectors, through the generation of extraordinary cash flows. I agree that valuations have been overloaded for many tech stocks, but they remain the ones with the best long-term earnings growth prospects.
News about the vaccine, the lockdowns and the US presidential transition are sources of volatility in the coming weeks. However, this can create good opportunities to buy the falls.
