Positioning portfolios for three megatrends

Insights from Morgan Stanley Wealth Management


Increased consumer spending, an expanding digital economy, and an emerging class of Millennial investors could power stocks in the years ahead. Learn how to prepare portfolios.

While investors often focus on daily headlines about the post-pandemic reopening and economic recovery, it’s important to step back and think about the longer-term impact of COVID-19. The question is not always what it means for the stock market next week, next month, or even next year—but what are the implications over the next two to three years?

Daniel Skelly, Head of Market Research and Strategy at Morgan Stanley Wealth Management, highlights three megatrends for investors to watch in the years ahead and what they may mean for stocks.

1. A surge in consumer spending

The most immediate driver of both economic growth and stock prices may be a continuation of strong consumer spending, thanks to additional fiscal stimulus hitting the wallets of many US consumers. The vaccine rollout and resulting reopening of the economy could also drive further spending on a variety of services. In June, Ellen Zentner, Morgan Stanley’s Chief US Economist, forecast this year’s GDP growth at 7.1%, as rising labor income boosts the buying power of households and excess savings remains an important cushion. 

Conditions today contrast with 2008, when the housing market was the epicenter of the financial crisis. This time around, most consumers are not dealing with high debt or defaults, and banks remain financially strong and ready to lend to both business and individual borrowers. That could help drive faster economic growth.

In fact, many American consumers socked away cash during the pandemic, pushing the savings rate from 7.2% in December 2019 to a record high of 33.7% in April 2020.

Source: FRED® Economic Data

2. An expansion of the digital economy

The forces of digital transformation already dominated consumer and corporate spheres prior to COVID-19—and the pandemic has only hastened this multiyear trend toward digitization. Katy Huberty, Head of North American Technology Hardware Equity Research at Morgan Stanley, sees early evidence of business-model shifts that anticipate permanent changes in consumer preferences and accelerating trends in e-commerce and e-services. She also sees wider adoption of technologies such as cloud computing, collaboration tools, automation, and data analytics.

With the pandemic pushing office employees to work from home, the past year saw a sharp 30% increase in corporate spending on tech hardware, which is likely to spur higher spending on digital services as the economy recovers and companies adjust to a “new normal.” Lisa Shalett, Chief Investment Officer for Morgan Stanley Wealth Management, believes that this imminent spread of technology throughout sectors, such as financials, industrials, and health care, will define this cycle, in contrast to the consumer focus that dominated the previous tech cycle.

In a Morgan Stanley survey of chief information officers in June 2020, significant percentages said collaboration software, cloud services, and other digital tools will see sustained growth.

Source: "Emerging Themes in Life After Covid" Morgan Stanley Research, June 21, 2021

3. An emerging generation of Millennial investors

In 2019, Millennials—those born between 1981 and 1996—overtook Baby Boomers as the largest demographic cohort in the US population, accounting for 22%. Gen Z, born after 1996, account for another 20%. Millennials are now the predominant generation in the workforce, a trend that has helped broaden the equity investor base.

The first Millennials turn 40 this year, and their investment path looks similar to what Boomers experienced during their peak investing years in the 1980s and 1990s. Currently, only 6.5% of Millennials’ assets are in equities, similar to the 6% allocation Boomers had at age 40.1 In subsequent years, the Boomers’ equity allocation grew to over 25%,1 implying further stock-market inflows may be in store.

Source: Federal Reserve, Distributional Financial Accounts

While that demographic tailwind is bullish for stocks, it’s important to point out that valuations are higher today, with the S&P 500® Index’s forward price-to-earnings ratio of 21 vs. 12 in 1990. Even as demographic-driven equity-market inflows may support an upward trend for stocks, the magnitude of gains realized in the 1990s is unlikely.

Preparing for a new market environment

With the expectation for resurgent growth powered by tremendous fiscal spending and a Federal Reserve committed to letting inflation run hot, this cycle could be hotter—but shorter—than previous ones, as inflation picks up. Inflation is still rising from historically low levels, and equities have tended to do well amid a low, but rising, inflation backdrop.

That means it may be an ideal time for investors to consider exposure to assets that stand to benefit from longer-term shifts underway in consumer spending, digitization, and demographics. As always, though, any decisions should reflect individual goals, timelines, and risk tolerance. 

The source of this Morgan Stanley article, Is Your Portfolio Positioned for These Three Megatrends?, was originally published on June 30, 2021.

  1. “Distributional Financial Accounts,” Federal Reserve, March 19, 2021: https://www.federalreserve.gov/releases/z1/dataviz/dfa/index.html   
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