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Weekly Equity Market Commentary

Equities stumble, but we see reasons for optimism

Equities Investment Council
The Nuveen Equities Investment Council is led by Saira Malik and comprises the firm’s senior portfolio managers averaging three decades of investing experience.
Saira Malik
CIO, Head of Global Equities
Equities Investment Council member Saira Malik

Weekly market update highlights

Labor Day week wound up being laborious for equities, as the wall of worry proved too difficult to climb. Concerns about a looming Fed taper, a complicated path for stimulus and debt ceiling negotiations and ongoing worries about the Delta variant drove the S&P 500 (-1.7%), DJIA (-2.4%) and Nasdaq (-1.4%) to finish in the red. The U.S. Treasury curve steepened, and the 10-year yield held above 1.30%.

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Market drivers & risks

Economic week in review

While we understand the reasons for recent concerns, we remain generally optimistic regarding further economic growth and continue to see upside potential in equities.

Risks to our outlook

The Delta variant could slow economic growth in several ways, but our primary concern centers on companies providing updates on continuing cost pressures and supply chain constraints.

Because factions within the Democratic caucus have delayed progress on the Biden administration’s stimulus push, markets have yet to assess or react to the increases in corporate and capital gains taxes that would accompany passage of the federal spending package.

As we saw last week, equity markets are susceptible to pullbacks. Weak economic data, valuations that are considered too high or overextended investment sentiment all have the potential to spark negative market reactions.

Despite these risks, the global economy and equity market fundamentals remain strong, and we remain confident in the market’s ultimate ability to climb the wall of worry.

Best ideas

An environment of stronger relative earnings growth and attractive valuations in developed non-U.S. markets, particularly in Europe, could be a catalyst for outperformance by select stocks in cyclically oriented sectors. We remain broadly bullish on emerging markets, but are guarded with respect to Chinese equities. Near term in the U.S., we see opportunities in defensive sectors and structural growth stocks during this period of soft economic data, but continue to favor a long-term approach that balances these exposures with cyclicals and value.

In focus: Financials: solid opportunities, but selectivity is key

Bank stocks are up nearly 30% year to date, outperforming the broad S&P 500 Index by more than 10%. This strong relative performance can be attributed to an improving U.S. economy, higher interest rates, increased capital return, strong (and better-than-expected) credit quality and an inexpensive starting point for valuations.

Banks are now trading well off their 2021 peaks, however, as the 10-year U.S. Treasury yield has retreated from its March highs and reflation expectations have cooled. Current valuations appear fair, and fundamentals are mixed, with the 10-year yield hovering around 1.3% and soft loan growth making it more challenging to reach net interest income expectations.

We believe loan growth is being held back by supply-side disruptions, the roll-off of small-business Paycheck Protection Program (PPP) lending, economic uncertainty and diminished demand for credit due to flush corporate and consumer balance sheets. We don’t expect these factors to be obstacles as we head into 2022.

Today’s market environment for banks and other financial services industries should create opportunities for bottom-up stock pickers. Among the ideas we favor are regional banks with strong expense controls leading to better operating leverage, select credit card names that are less dependent on interest rates and financial companies returning above-average levels of capital to investors via dividends and share buybacks.

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Endnotes

Sources

All market data from Bloomberg, Morningstar and FactSet

The views and opinions expressed are for informational and educational purposes only as of the date of production/writing and may change without notice at any time based on numerous factors, such as market or other conditions, legal and regulatory developments, additional risks and uncertainties and may not come to pass. This material may contain “forward-looking” information that is not purely historical in nature.

Such information may include, among other things, projections, forecasts, estimates of market returns, and proposed or expected portfolio composition. Any changes to assumptions that may have been made in preparing this material could have a material impact on the information presented herein by way of example. Past performance is no guarantee of future results. Investing involves risk; principal loss is possible.

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such. For term definitions and index descriptions, please access the glossary on nuveen.com. Please note, it is not possible to invest directly in an index.

A word on risk 

All investments carry a certain degree of risk and there is no assurance that an investment will provide positive performance over any period of time. Equity investing involves risk. Investments are also subject to political, currency and regulatory risks. These risks may be magnified in emerging markets. Diversification is a technique to help reduce risk. There is no guarantee that diversification will protect against a loss of income.

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