The US economic recovery is well underway and current economic data seems to indicate that we are moving towards the mid cycle. While the economy is rebounding, we continue to monitor incremental risks that could represent headwinds for US stocks.
Unemployment levels, inflation concerns, and the actions and commentary of the Federal Reserve are all likely to be integral to investor sentiment. In addition, new variants of Covid-19 and the rollout of the vaccines will also have a crucial role to play.
There seems to be little evidence at this stage to suggest that the recovery will be derailed as economic activity remains strong and the US consumer, in aggregate, is in good health with plenty of spending power.
The easiest part of this recovery may be behind us, but overall we feel comfortable that economic growth as well as earnings growth are likely to exceed our pre-pandemic levels this year, which provides scope for the US equity market to move higher from here.
Although growth has been the clear winner in the US over the past year – except for the first quarter of 2021, when value funds outperformed – we believe that markets at present are passing the baton between the two. It is now more important than ever for investors to balance value and growth stocks to support overall portfolio diversification.
US banks have benefitted from a favourable macroeconomic environment, along with expectations that interest rates will move higher, sooner than previously assumed.
Positive economic indicators also reinforce the market’s confidence in a continued strong US recovery, with many strategists predicting 4% GDP growth for 2022. Relative valuations suggest there is still more room to run in the space.
Bank of America has benefited from the macro environment. During 2020 the bank prepared for the worst, setting aside billions for potential losses. Yet when this scenario thankfully didn’t materialise, Bank of America ended 2020 in a stronger financial position than it started.
The bank has since continued its strong run and recently announced a $25bn (£17.7bn) share repurchase programme. The company’s share price was up 39% over the first eight months of 2021 and we believe that this recovery has further to run.
Trading at 1.4x book value and a forward price-to-earnings of 13.6x, as of the end of August, with a dividend yield of 2%, Bank of America looks very attractive on a risk-versus-reward basis and should trade at a much higher multiple.
We remain confident in the ability of the bank’s management team to grow margins through efficiency improvements and in the diversified nature of its business mix. Furthermore, the business has strong reserves, which creates a compelling case for capital return in the form of additional buybacks and/or dividends.
We believe the copper markets will be well supported for at least the next several years on strong demand fundamentals, including newly created demand from the green energy transition and limited additional supply. One growth name that we recently added to the portfolio is Freeport-McMoRan, a leading global copper miner with production in the US, Peru, Chile, and Indonesia. Copper is a critical ingredient for large-scale deployment of climate change-fighting technologies like electric vehicles and renewable energy.
Freeport-McMoRan has a disciplined management team and a strong balance sheet. It has the potential to produce strong cash flows, with a commitment to return much of this cash to shareholders.
While the economic recovery is underway, we remain balanced and continue to monitor incremental risks that could represent headwinds for US stocks. Through the volatility, we maintain exposure to quality, focus on high-conviction stocks, and take advantage of market dislocations for compelling stock selection opportunities.
Fiona Harris is an investment specialist at JPMorgan American investment trust. The views expressed above are her own and should not be taken as investment advice.