asset allocation  |  july 28, 2021

A Moderating Outlook for Equities

Stock returns may be subdued, as key performance drivers peak.


Key Insights

  • Our Asset Allocation Committee modestly decreased the allocation to equities recently, given elevated stock valuations and a moderating economic outlook.

  • In our view, key performance drivers may peak in the near term, which could temper potential equity returns going forward.

Tim Murray, CFA

Capital Markets Strategist, Multi‑Asset Division

In March and April, our Asset Allocation Committee moderated the allocation to stocks relative to bonds, which was surprising given the very strong economic environment and improving earnings expectations.

The decision to underweight stocks was driven, in part, by elevated stock valuations after a period of very strong appreciation. In the 12 months ended March 31, 2021, both the S&P 500 Index and the MSCI All Country World Index rallied by more than 50%. As a result, overly optimistic expectations pushed forward price-to-earnings (P/E) ratios higher (see Figure 1), and a lot of good news was already incorporated in stock prices. Further, despite an appealing macroeconomic environment, evidence was emerging that some of the tailwinds for stocks—such as accommodative monetary and fiscal policies and strong economic growth—might peak soon.

A Changing Macro Environment

Stock returns may be subdued going forward

A Changing Macro Environment Line Graph & Line Graph with Text Combined

As of May 31, 2021.
Past performance is not a reliable indicator of future performance.
Sources: Standard & Poor’s. MSCI. T. Rowe Price analysis using data from FactSet Research Systems Inc. All rights reserved. See Additional Disclosures.
*The Four Largest Central Banks are U.S. Federal Reserve, European Central Bank, Bank of Japan, Central Bank of China
Source: Bloomberg Finance L.P. MSCI. T. Rowe Price analysis using data from FactSet Research Systems Inc. All rights reserved. See Additional Disclosures.

While stocks have continued to advance in recent months, the positive impact from these key drivers has started to diminish. In June, Fed policymakers appeared more concerned about the pace of inflation, highlighting the likelihood that global central banks have probably surpassed the point of peak dovishness. Notably, the rate of change in asset purchases by the world’s four largest central banks is already slowing (see Figure 2)—typically a headwind for stocks. Also, fiscal stimulus is likely to peak soon with lower government spending expected in 2022 as coronavirus relief measures fade, and an increase in U.S. corporate taxes to fund recovery costs is likely.

In our view, the changing economic environment could temper potential equity returns. As a result, we believe a more moderate allocation to equities may be appropriate going forward.

Additional Disclosures

Financial data and analytics provider FactSet. Copyright 2021 FactSet. All Rights Reserved.

The “S&P 500 Index” is a product of S&P Dow Jones Indices LLC, a division of S&P Global, or its affiliates (“SPDJI”) and has been licensed for use by T. Rowe Price. Standard & Poor’s® and S&P® are registered trademarks of Standard & Poor’s Financial Services LLC, a division of S&P Global (“S&P”); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”). This product is not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P or their respective affiliates, and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the S&P 500 Index.

MSCI. MSCI and its affiliates and third party sources and providers (collectively, “MSCI”) makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein.  The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI. Historical MSCI data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.

Important Information

This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action.

The views contained herein are those of the authors as of July 2021 and are subject to change without notice; these views may differ from those of other T. Rowe Price associates.

This information is not intended to reflect a current or past recommendation concerning investments, investment strategies, or account types, advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. The opinions and commentary provided do not take into account the investment objectives or financial situation of any particular investor or class of investor. Please consider your own circumstances before making an investment decision.

Information contained herein is based upon sources we consider to be reliable; we do not, however, guarantee its accuracy.

Past performance is not a reliable indicator of future performance. All investments are subject to market risk, including the possible loss of principal.  All charts and tables are shown for illustrative purposes only.



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