There are unmistakable signs of improvement in several sectors of the US economy. Even if various legislative growth initiatives are implemented slowly, it appears economic growth can improve from here. We believe a backdrop of slow, but sustained, growth can be quite supportive for the overall market. 
US equity markets in general appear fully valued, but we do not think that necessarily precludes stocks from further gains. However, it does mean a more circumspect approach to the market is appropriate at this point in the cycle.
By our estimation, the outlook for corporate earnings remains quite strong. Also, interest rates and inflation have started to behave a bit more like we have expected, with moderate increases in both. We do not view gradually rising interest rates as a headwind, but rather as corroborating evidence the global economy is in reasonably good shape.
We believe the US economy should benefit, at least to some degree, from reduced regulation and the effects of lower corporate taxes; although the ultimate effect remains uncertain. While we must recognise legislation is complicated, the potential benefits of tax reform should not be underestimated. Taxes have been reduced for most individual taxpayers and the corporate tax rate has reduced from 35 per cent to 21 per cent. Also, the repatriation of cash held overseas by corporations at more favourable tax rates could have profound effects over time.
However, perhaps more important than legislative actions, game-changing technologies are creating tremendous efficiencies and benefits for consumers, while also disintermediating portions of major industries. Advancements in e-commerce, cloud processing, enhanced payment systems and other disruptive technologies are resulting in the replacement of some forms of labour with technology – which is are also having a deflationary effect on many goods and services. In our view, the benefits of these changes outweigh the drawbacks – as consumers are clearly benefiting from low-cost, easy access to a broader array of goods, services and information.
Although higher valuations have skewed the risk/reward profile of some stocks less in our favour, there are still interesting opportunities in secular growth names with strong fundamentals able to comfortably grow multiples over the next few years. Many of the stocks we find compelling are multinationals creating or adapting to new technologies. These companies are also often well diversified by product line and geography, which tends to provide stable growth in earnings and free cash flow.
While we remain cautious about investing in structurally-challenged industries – such as retail, cyclical sectors including industrials and defensive sectors such as consumer staples – we continue to identify opportunities in the information technology, consumer discretionary and healthcare sectors. Valuations in select names in these three sectors do not appear too frothy, given the trajectories of the underlying businesses.
Information Technology
We maintain a significant weighting in the information technology sector, as we continue to find attractive opportunities in companies with innovative business models able to take advantage of transformational change. We favour companies with durable business models addressing large and growing markets, including Internet search and advertising and social connectivity.
The shift toward e-commerce has also led to a change in the way consumers are paying for goods and services. Cash and paper forms of payment are being replaced by credit card, online and mobile payments. Our long-term holdings in MasterCard, Visa, and PayPal are direct beneficiaries of this investment theme.
Consumer discretionary
We remain optimistic about stock-specific opportunities within the consumer discretionary sector. Consumer confidence has been bolstered by an improving labour market, rising wages and lower gas prices. We favour businesses benefitting from the secular shift of consumer spending to online retail. We are also focused on companies positioned to benefit from the long-term growth in online travel services.
We have a core holding in online travel company Booking Holdings. Booking Holdings has first-rate management, strong balance sheet, sound strategy and a robust business model. Its broad and diverse geographic exposure – particularly to underpenetrated markets – along with the growing popularity of online travel booking, supports our belief the firm is well positioned for future growth.
Healthcare
We are focusing on select therapeutics and medical device companies we believe have limited exposure to potential regulatory reform. Therapeutics companies with broad pipelines and pioneering new treatments that meaningfully improve patient survival rates are likely to face less pressure on drug pricing.
We are also emphasising managed care companies positioned to benefit from industry consolidation, as well as the increasing focus on providing cost-effective solutions. Companies that develop innovative medical devices and equipment represent another attractive long-term growth opportunity. In healthcare, we like companies such as UnitedHealth Group.
Larry Puglia is portfolio manager of the T. Rowe Price US Blue Chip Equity fund. The views expressed above are his own and should not be taken as investment advice.