Could the Delta variant derail economic growth?

Insights from Morgan Stanley Wealth Management


Summary: The recent sharp rise in new infections has reignited fears of disruption to the US recovery and outlook for markets.

The rapid spread of the coronavirus Delta variant has forced the world, once again, to grapple with heightened pandemic anxiety. In the US, the variant’s surge has added to fears that the virus could meaningfully undermine economic growth. 

Financial markets had already been operating with a “growth scare” mindset for some time. Now, virus concerns appear to be driving renewed interest in work-from-home technology stocks, with mega-capitalization secular growth names outpacing cyclical and small-to-mid-cap equities, while US bond prices rally and interest rates dive. For many investors, these market dynamics seem to signal a major economic slowdown ahead.

While the latest public-health challenges are concerning, the variant may not destabilize the economic recovery in a way that justifies current market positioning. Morgan Stanley’s view is that the Delta variant’s economic impact is likely to be minimal, given little need and low appetite for business lockdowns, which originally stemmed from overwhelmed hospitals. And that's largely because this problem now appears to have a solution: vaccinations.

At the moment, despite the variant’s higher transmissibility, over 99% of recent COVID-19 hospitalizations and deaths have occurred in unvaccinated people, according to preliminary data from the US Centers for Disease Control and Prevention.1 But already, vaccination rates in the hard-hit US Southeast are accelerating. 

Of course, the public health crisis is far from over and that it will undoubtedly impact the shape of the economic recovery. But overall, economic fundamentals still look strong. Consider that:

  • US service-sector growth is accelerating. Just recently, the July reading for the Institute of Supply Management’s non-manufacturing purchasing managers’ index (PMI®) hit an all-time high of 64.1, marking the 14th straight month of growth.2
  • Bank lending is picking up. There’s movement in the once-quiet market for bank lending—a key ingredient to improving the flow of money through the economy.
  • International developments are signaling positive tailwinds. For example, the Eurozone Composite PMI reached 60.2 in July, indicating the fastest pace of business-activity expansion in 15 years.3

It’s notable that today's market risks appear to reside in the richly valued S&P 500® Index and the crowded tech sector. At current levels, the index is trading around 22 times future earnings—high by historical standards. It’s also dominated by tech: The index’s five largest stocks by market capitalization are well-known tech titans, which comprise 23% of the index. For context, the comparable figure was 18% at the height of the dotcom boom. In other words, investors of S&P 500 funds may be unintentionally concentrated in a handful of tech stocks that are trading near record levels. 

Bottom line: All told, general concerns about an economic slowdown, as well as market fears more specifically pegged to the Delta variant, seem largely unwarranted—as does investors’ persistent push into alleged defensive trades that favor mega-cap tech stocks. Indeed, the cyclical recovery still has more room left to play out in services, bank lending, inventory restocking, and global trade. 

Investors may be exploring cyclicals, small- and mid-cap stocks, as well as non-US developed-market stocks, as they look ahead to above-average economic growth in 2022. Emerging markets may also make sense for patient, long-term investors. As always, though, portfolios should reflect personal goals and risk-tolerance levels, keeping in mind that diversification is a solid strategy in all market conditions.


The source of this Morgan Stanley article, Could the Delta Variant Derail Economic Growth?, was originally published on August 10, 2021.

  1. Press Briefing by White House COVID-⁠19 Response Team and Public Health Officials, July 22, 2021,
  2. Institute for Supply Management, July 2021 Services ISM® Report On Business®, August 4, 2021,
  3. IHS Markit Eurozone Composite PMI®, August 4, 2021,

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