This piece reviews the major secular investment trends that will influence the economy and markets in the coming years.

Major Investment Themes for the Next Decade

  1. Recently demonstrated advancements in artificial intelligence (AI) highlight the transformative potential of technology advancements. There were already many secular trends in place for the Technology sector, including e-commerce and increased internet usage, cloud computing, big data and advanced analytics (led by AI), automation, advanced communication systems, and cybersecurity. As a result of the pandemic and recent AI advancements, these trends have accelerated, to the benefit of the Technology sector. We see these trends as sustainable and critical for enhancing productivity and economic growth in the coming years.
  2. The Communication Services sector also benefits from secular technology trends, with firms well positioned for consumers spending more time online with advertising dollars following.
  3. Health Care is another sector that remains well-positioned with secular trends due to aging demographics and technological advances.
  4. Firms from many other sectors of the economy that were already leaders in successfully implementing advanced technology should see their competitive advantage enhanced in the coming years as they continue to lead in technology implementation.
  5. Many Technology, Communication Services, and Health Care stocks are considered growth stocks, with these sectors making up a combined 52% of the S&P 500 stock market index (more on this below). Given the secular trends for these sectors, lack of exposure to them and their themes could be costly to portfolio performance.
  6. The accelerating movement toward clean energy has implications for many sectors, especially Energy, Materials, Utilities, and Industrials, that are discussed below.
  7. While clean energy represents a headwind for oil and gas firms, fossil fuels meet approximately 80% of today’s energy demand, and oil and gas firms remain critical to the economy with traditional energy in demand for the foreseeable future.
  8. Pandemic-induced supply chain disruptions coupled with geopolitical tensions with China are causing many firms to consider “onshoring” or bringing manufacturing back to the U.S. This is leading to a U.S. manufacturing renaissance that benefits many sectors of the U.S. economy. “Nearshoring” or moving manufacturing from China to nearby or friendly countries, is also an important investment theme.
  9. The Financial sector (particularly banks) has been negatively impacted by interest rate hikes that produced higher long-term interest rates and an inverted yield curve (short-term interest rates higher than long-term rates). We expect interest rates to normalize as inflation falls toward the Federal Reserve’s 2.0% target. This should provide a more favorable backdrop for financials in the coming years.
  10. We continue to favor high-quality companies with strong balance sheets and the ability to grow cash flow and dividends that offer exposure to the above secular themes.
  11. As always, we recommend investors stay invested in a well-diversified portfolio with periodic rebalancing—keeping in mind the above secular themes.

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