Our long-term outlook for the economy and the trends within it indicates that some industries and stocks have become overheated, while others have been unfairly overlooked.
We’ve identified three trends that have the greatest ability to reshape the postpandemic economy: shifting workplace patterns, social distancing and its impact upon travel and dining sectors, and acceleration of e-commerce and digital entertainment trends.
As we evaluated the potential impact of these trends, we took these factors into account:
- Expected vaccine timeline. While we don’t believe it will be possible to end the pandemic without a vaccine, we are optimistic that a successful one will be developed relatively soon. Several vaccines have yielded promising early-stage data, and if they see similar success through all trial phases, we expect the FDA could award three emergency-use authorizations for frontline healthcare workers and high-risk individuals by the end of 2020 or in early 2021. We’re also hopeful that they will develop enough vaccines to supply the remaining population during the first half of 2021. As long as a high percentage of adults in the U.S. choose to be vaccinated, we think the U.S. is likely to achieve herd immunity in the second half of 2021, largely due to vaccination, not infection.
- Short-term and long-term economic disruption. We expect U.S. GDP will drop about 5% this year, double the rate of decline in 2009 and the largest contraction since 1946. But since a company stock’s value is driven more by long-run outlook than a short-term economic disruption, COVID-19’s long-term effect on economic activity is more relevant to investors, and we expect that impact on total U.S. GDP will be minimal. Our analysis of historic global recessions found that many recessions don't have a long-run impact on the economy, and the ones that do are generally the product of persistent economic policy error. Since fiscal stimulus was fairly strong during the pandemic, we think risks of a financial crisis are low and that U.S. GDP will recover to just 1% below our prepandemic expectation by 2024.
- Overvalued and undervalued stocks and sectors. When the stock market crashed in March, many companies were trading at levels far below their intrinsic value—the ratio of market price to our fair value estimate for the median stock under our coverage fell to its lowest level since the depths of the 2008 global financial crisis. But equity indexes have rebounded sharply from the March lows as investors regained a longer-term economic outlook. So, while we thought stocks were extremely undervalued in March, they have now gone in the opposite direction: As of Sept. 30, the price/fair value ratio has reached 1.03, implying that many stocks are now fairly to slightly overvalued.