In contrast to global synchronized growth of the recent past, COVID-19 has driven a wave of synchronized global recessions. However, the recovery is expected to be uneven with countries and U.S. states trending differently. Millions might be tipped back into poverty and financial distress could trigger defaults in developed and developing markets, offering additional challenges to business plans and financial results.
While the overall U.S. unemployment rate has shifted back toward historic norms, the unemployment rate for minorities, the less educated, and the young is still more than double the college-educated rate. The uneven recovery in employment is likely to have longer-term ramifications for economic growth and consumer sentiment. However, a record number of entrepreneurs—more than 1 million—sought out new business applications in 2020, signaling the potential for a new wave of innovation.
Source: U.S. Bureau of Labor Statistics
In 2021, nearly two-thirds of S&P 500 firms are expected recover to 2019 earnings-per-share levels, a potentially conservative estimate based on recent trends of firms substantially outperforming analyst expectations. While smaller firms are expected to recover more slowly, firms of all sizes have bolstered cash on balance sheet to levels not seen in over 50 years. Strong and affordable access to capital markets has been a critical factor behind the increased corporate liquidity.
Active policies by central banks have helped to facilitate a rapid recovery of debt markets. The recovery of spreads has led to high levels of Investment Grade (IG) and High Yield debt issuances. The rise of zero- or negative-yielding corporate debt globally has made the U.S. IG market essentially the only place to find yield underpinned by strong credit quality. This supports the likely continued strength of the market, with attendant benefits to the U.S. economy also likely.
Throughout 2020, Moody’s and S&P took several ratings actions to reflect market dynamics, with the vast majority impacting non-IG firms. While S&P has issued more downgrades (7.4x) than Moody’s (4.8x), the overall result is that ratings between agencies are now more aligned. While High Yield firms have taken the brunt of ratings actions, the debt capital markets have remained supportive.
Equity market performance has been extraordinarily strong despite the pandemic, with even smaller firms recouping their losses—and then some—by the end of 2020. Equity market strength has supported an explosion of issuance, including record IPO activity dominated by SPAC listings, and there is potential for additional upside in 2021.
With pressure building on fossil fuel companies to embrace and adapt to the energy transition, 2020 saw market caps of Power & Renewables companies surpass those of Oil & Gas companies. Additionally, ESG-oriented bond markets issuance increased by 62% in 2020, the largest dollar increase to date. The unwavering focus on ESG and energy throughout pandemic-induced volatility illustrates the resiliency of the trend.
The stereotype of the retail investor as the passive income-oriented retiree was challenged in 2020, as low-cost trading platforms and stay-at-home orders manifested as a large-pick-up in retail investment —particularly in high-growth firms, this retail investor trend likely helped contribute to the outperformance of growth-oriented firms through 2020, in contrast to the Global Financial Crisis when long-term dividend payers were one of the best-performing equity groups within the S&P 500.
Factors supporting growth (e.g., lower taxes, higher margins) are facing headwinds and organic investments have steadily declined across the market over the last several decades. Investor interest in is growth increasing, but opportunities are more limited. This has caused the relative value of growth in the market to reach multi-decade highs: 160% higher than the past 20 years. The longstanding trend of high-growth firms receiving outsized valuation premiums was evident even prior to COVID-19, and could persist throughout the recovery.
M&A activity is being driven by market underperformers more than ever as firms seek paths to growth, efficiency and resiliency. Regardless of inequalities highlighted by the pandemic in terms of recovery, employment, and market performance, M&A strategies have remained attractive for just as many market underperformers as outperformers. Despite a volatile year that saw all-time high VIX levels, M&A activity was comparable to other non-recessionary years during the past two decades—and may be the great equalizer that can boost recovery regardless of size, scale, or past performance
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