Capital Market Outlook (March 8, 2021)


  • Macro Strategy—Despite long-term demographic challenges, the rising millennial generation should support economic growth and inflation as they invest more of their rising incomes and wealth, keeping the secular bull market running in the decade ahead.
  • Global Market View—We believe the U.S. is on the cusp of a super-cycle in infrastructure spending owing to a confluence of factors including social inequalities, climate change challenges, health care considerations and geopolitics. The icing on the cake: the latest grade on America's infrastructurean uninspiring C-.
  • Thought of the Week—Women are currently facing unprecedented and unsustainable struggles as a result of the global health crisis and the path to gender equality has taken a significant hit. On International Women's Day, we acknowledge the power that gender parity can bring, to investors and corporates alike.
  • Portfolio Considerations—This month we adjusted our sector views by raising Energy, which was balanced by a move lower in Technology and a downgrade to Consumer Staples. We reaffirm our positive view on Equities relative to Fixed Income and expect participation to broaden across sectors, regions and styles.

Rising Millennials Should Keep The Secular Bull Running

Despite a 75% rise in the S&P 500 from last March's bottom, we continue to believe that we are in the midst of a secular bull market that began in 2013 as the index broke out to new highs and that was rudely interrupted by the exogenous pandemic-related bear market. Accommodative monetary policy, higher levels of economic growth and corporate cash flows, innovation and productivity, manufacturing revival and reshoring are some of the long term pillars for this market, in our view. However, in addition to these, the growing millennial cohort, which is currently entering its peak years of consumption and investing, should add to this equity uptrend by supporting growth, corporate earnings and valuations. We are already seeing early evidence of risk-assuming behavior through the increased participation of retail investors in the equity market and a boom in the housing market.

Millennials should build a new equity culture

Millennials have surpassed baby boomers as the most sizeable generation in the U.S., with an estimated national population of 72.1 million1. As this unprecedentedly large demographic enters their prime years for saving and investing, they should continue to accumulate assets and shape consumption trends.

Defined as people born between 1981and19962, millennials ranged from age 24 to age 39 in 2020 and are on the cusp of an age bracket characterized by higher levels of earnings and investing. Average income increases by 91% after the age of 25 and peaks between ages 45 and 54, according to the Bureau of Labor Statistics 2019 Consumer Expenditure Survey. This increased income is often deployed for investments specifically into equities, as the Survey of Consumer Finances found that stock holdings increase at age 35 and peak between ages 45 and 54 on average, as illustrated in Exhibit 1. As millennials continue to age into this bracket, their increased contribution to financial markets could have a sizeable effect on asset prices.

Exhibit 1: Average Stock Holdings Peak Between Ages 45 and 54.

Equities and generational peaks

Historically, the long-range trajectory of the equity markets has had an association with changes in the prime working-age population. Equities have tended to trend higher when the predominant generation is in their prime, and conversely have struggled when this generation has peaked, as illustrated in Exhibit 2.

The Dow Jones Industrial Average was trending upwards until the peak of the greatest generation in 1930, which overlapped with the Great Depression and a massive 89% decline in the index. Thereafter, the silent generation moving into their prime working years supported the recovery until their generational peak in 1974, when the Dow declined 35%. The end of World War II led to an explosion in population with the baby boomer generation, and as they entered their prime savings and investing years in the 1980s, we experienced one of the longest bull markets of all time. We started to see declines when Baby Boomers reached their peak in 1999, and again when Gen X peaked in 2018. If demographic trends hold, there could potentially be further room to run for this secular bull market, as the millennial generation is not expected to peak until around 2038.

Exhibit 2: Markets Trends Can Be Associated With Demographics Changes.

A rising middle-age cohort has been positive for equities and valuation

One way to understand the association between equities and demographics was shown in a study called "Demography and the Long-Run Predictability of the Stock Market" by Geanakoplos, Magill and Quinzii, using the Middle-Young (MY) ratio. The ratio reflects the relative size of the working-age population by measuring the number of "mature" workers (ages 35 to 49) divided by the number of "young" workers aged 20 to 34. The higher the ratio, the higher the relative size of the middle-aged cohort.

The study quotes: "People have distinct financial needs at different periods of their life, typically borrowing when young, investing for retirement when middle aged, and disinvesting during retirement. Stocks (along with other assets such as real estate and bonds) are a vehicle for the savings of those preparing for their retirement. It seems plausible that a large middle-aged cohort seeking to save for retirement will push up the prices of these securities, and that prices will be depressed in periods when the middle-aged cohort is small."

It posits that the equity market should perform better when the MY ratio is rising than when it is falling. As illustrated in Exhibit 3, the MY ratio has correlated with equity market performance and valuations multiples such as the price/earnings (P/E) ratio over time. It peaked in 2000 and didn't trough till 2016, and is expected to trend higher at least till the mid-2030s. While there is likely to be several bear markets between now and then, and the ratio may be of little help in timing short-term moves, it does indicate that there is a strong foundation for long-term investors.

Exhibit 3: A Rising Middle-Young Ratio Could Help To Support Equity Evaluations In the Next Decade.

The Great Wealth Transfer should drive certain themes

The positive effect of millennials on the stock markets over the next 10 to 15 years could be further amplified by their expected participation in the impending Great Wealth Transfer. BofA Global Research found that the silent generation and the baby boomers held $78 trillion, or 80% of all household wealth, as of Q2 2020. Estimates vary significantly with regards to how much wealth will be transferred to younger generations over the coming decades, but it could range anywhere from $30 trillion to $68 trillion.

As millennials become more affluent, the effect of their consumption and investing preferences will likely become more pronounced. This generation emphasizes their values when investing and tends to support businesses, brands and products that contribute to societal well-being—85% of millennials will seek out environmentally and socially responsible products whenever possible.4 Given their relative comfort level with technology, the younger generation is also attracted to new-economy digital-based companies that tend to be more growth oriented. And as they enter their mid-30s, they are more inclined to be less interested in renting and more to transitioning to homeownership and suburban living, fueling the current V-shaped housing recovery that started to materialize last year. We expect these trends to continue to build steam in the decade ahead.


In the long run, despite the potential for millennials to provide an economic boost in the coming decade, demographic challenges remain as reported in the Capital Market Outlook "Measuring Coronavirus Influence on Demographics", February 1, 2021. The global population continues to age, and the graying of baby boomers as they enter retirement could potentially cause a drag. The bearish demographic narrative is further amplified by the pandemic induced "baby bust," which estimates 300,000 to 500,000 fewer births in the aftermath of the coronavirus.5 These dynamics will likely have economic consequence in the long run.

Still, research suggests that there is room for upside over the next decade and a half. The maturing of the millennial cohort into the middle-age category should keep the secular bull market running for some time as they invest more of their rising incomes and wealth. Higher inflation may also be in the cards as this group maintains their growing demand for goods, and the services economy experiences a sharp pickup later in 2021 and beyond, due to consumer pent-up demand. With bond yields remaining at relatively low levels, equities will remain a viable source for capital growth and yield for them.

We continue with our overweight allocation to U.S. Large-cap equities and increasing exposure to cyclical areas of the market like Small-caps, Value and those that benefit from economic normalization like Financials, Energy and Industrials. New-economy themes like digital transformation, climate change, healthcare technology and Environmental, Social & Governance (ESG) overlays will continue to attract more capital from this cohort.

The Coming Super-Cycle in Infrastructure Spending

Every four years, the American Society of Civil Engineers (ASCE) publishes a comprehensive report card (A to F scores) on the nation's infrastructure and the estimated needs to close the infrastructure investment gap. Since 1998, America's infrastructure has earned persistent D averages; in 2017, the overall grade was D+.

With that as a backdrop, the grades for 2021 are in. The good news is that for the first time in over 20 years, America's infrastructure is out of the D range but just barely, with an overall grade of C-.

The bad news: As the C- implies, a great deal of work needs to be done to improve the underlying condition of America's infrastructure. Think of the latter as the backbone of the U.S. economy—a critical input determining America's overarching ability to produce, consume and compete. The stronger a nation's infrastructure (backbone), the stronger the nation's potential output. Conversely, a deteriorating infrastructure undermines business productivity, boosts operating costs, crimps trade, and lowers employment and income for U.S. households.

As the latest ASCE report notes:

"When we fail to invest in our infrastructure, we pay the price. Poor roads and airports mean travel times increase. An aging electric grid and inadequate water distribution make utilities unreliable. Problems like these translate into higher costs for businesses to manufacture and distribute goods and provide services. These higher costs, in turn, get passed along to workers and families."

Below are a few highlights on the state of America's infrastructure, while Exhibit 4 provides a snapshot on each category:

  • 42% of all the bridges in the U.S. are at least 50 years old; 7.5% of the nation's bridges are considered structurally deficient.
  • There is a water main break every two minutes in this country and an estimated 6 billion gallons of treated water is lost each day in the U.S., enough to fill over 9,000 swimming pools.
  • Owing to ever-increasing volumes of traffic, 43% of America's public roadways are considered in poor or mediocre condition. Deteriorating roads means American motorists spend $130 billion a year on extra vehicle repairs.
  • The average American spends 54 hours each year in traffic, up from 42 hours in 2014.
  • Broadband: When the pandemic closed the bulk of the nation's schools, an estimated one in five school-aged children lacked the high-speed internet connection needed to access lessons and other materials.

Exhibit 4: 2021 Report Card for America's Infrastructure.




Overall Grade


Grades have been poor/mediocre since the survey began in 1998, due to delayed maintenance and underinvestment across most categories.



Since 2019, forecasts for airport needs to expand or rehabilitate terminal buildings ballooned by 62%, pavement reconstruction needs increased by 28%, and capacity-related development needs rose by 31%.



There are more than 617,000 bridges across the U.S., 42% of which are at least 50 years old, and 46,154, or 7.5% of the nation's bridges, are considered structurally deficient.



Unfortunately, due to the lack of investment, the Association of State Dam Safety Officials estimates the number of deficient high hazard potential dams now exceeds 2,300.

Drinking Water


There is a water main break every two minutes and an estimated 6 billion gallons of treated water in the U.S. is lost each day.



The majority of the nation's grid is aging, with some components over a century old — far past their 50-year life expectancy — and others, including 70% of transmission and distribution lines, are well into the second half of their lifespans.

Hazardous Waste


The number of facilities where hazardous wastes are managed has decreased from over 2,100 to 964 between 2001 and 2019.

Inland Waterways


The U.S. Department of Agriculture estimates waterway delays cost up to $739 per hour for an average tow, amounting to $44 million per year.



Unmet waterside infrastructure needs at coastal ports will total $12.3 billion over the next 10 years.



The Department of Transportation's Federal Railroad Administration reported a total of 11,667 accidents/incidents, a slight increase from 11,247 incidents 10 years ago.



Our deteriorating roads are forcing the nation's motorists to spend nearly $130 billion each year in extra vehicle repairs and operating costs.



41.7% of U.S. households have only one vehicle or less and could benefit from transit options — while 45% of Americans have no access to transit.

A=Exceptional; B=Good; C=Mediocre; D=Poor; F=Failing.

Investing in infrastructure: Is this time different?

Calls to increase infrastructure spending in the U.S. are as old as many America's deteriorating bridges. Yet total public spending on infrastructure has been on the decline for years, with America's infrastructure gap (the money allocated for infrastructure versus spending needs) now in the range of $2.6 trillion based on the next 10 years. Exhibit 5 underscores the 10-year investment gap by sector—with every sector underfunded relative to the needs of the next decade.

Exhibit 5: Cumulative Investment Needs by System Based on Current Trends, 2020 to 2029 (in billions).

Infrastructure System

Total Needs


Funding Gap

Surface Transportation




Drinking Water / Wastewater / Stormwater












Inland Waterways & Marine Ports








Hazardous & Solid Waste








Public Parks & Recreation












Enter the Biden Administration and a Democratic Congress with plans to spend up to $2 trillion on America's aging infrastructure. Whether the president gets his entire infrastructure package remains to be seen, but the odds favor some type of deal by the end of the year.

Beyond the president's laser-like focus on America's physical state, a super-cycle in infrastructure spending could be on the horizon owing to a number of factors. One, the pandemic of 2020 has exposed glaring infrastructure inequalities in internet readiness in the U.S., with inner city and rural areas lagging in terms of internet accessibility and affordability. A consensus is emerging about the idea that upgrading America's infrastructure is one plank in addressing income and social inequalities in the U.S. Second, climate change and the movement toward "green" investing have only gained momentum with the aftershocks of the pandemic and America's recommitment to the Paris Climate Accord. Both the public and private sectors have become stewards of the environment, portending more spending on smart cities, green grids and increased outlays to decarbonizing the planet. Third and finally, with China now viewed as a strategic competitor rather than strategic partner, the U.S.-China Cold War pivots around advanced capabilities in 5G, smart grids and a connected/tech-driven infrastructure. The latter will largely determine who sets the pace in winning the race for technological supremacy in the 21st century.

Given all of the above, having a modern infrastructure may mean more than just having more efficient ports, less congested roads, and secured levees and dams. It could also address social inequalities, solving climate change challenges, meeting healthcare problems and positioning via geopolitical considerations. All of these variables, and more, portend increased infrastructure spending in the U.S. over the next decade. We believe we could be on the cusp of a super-cycle in infrastructure spending.

In terms of asset allocation, this means gaining more exposure to infrastructure-related industrial companies and leaders in renewables (solar, wind, electrical vehicles, biomass), and the required infrastructure behind each renewable energy source. Leaders in electricity distribution, charging stations, batteries, and low-carbon hydrogen, biomethane and advanced biofuels should be considered in portfolios. Ditto for leaders in low-carbon technologies (LED lighting, smart energy meters, and storage) and leaders in transmission technologies like high voltage direct current (HVDC), which transfers wind and solar power from where it is created to where it is needed. Think commodities as well, like copper, cobalt, lithium and rare earth minerals, among others.

In the end, the latest report card on America's infrastructure is a timely reminder of the challenges ahead—and attendant investment opportunities across a large swathe of industries and commodities.

Integrating A Gender Mandate Into Investments Is More Timely Than Ever

Women are currently facing unprecedented and unsustainable struggles as a result of the global health crisis—and the path to gender equality has taken a significant hit. On International Women's Day, we acknowledge the power that gender parity could bring to investors and corporates alike.

In December, women accounted for more than 100% of the 140,000 jobs lost (in fact women lost 156,000 jobs, while men gained 16,000). The statistics are even more discouraging for Black and Latina women. The women's labor force participation rate is at 57%—the lowest it's been since 1988. American mothers are now more than three times as likely to be responsible for most of the housework and caregiving—work that, if paid at minimum wage, would have earned them $1.5 trillion in 2019.

Women entrepreneurs—who pre-pandemic not only had a harder time getting venture capital, but also tended to get less money and inferior terms—also faced a deteriorating situation in 2020. More than 800 female-founded startups globally received a total of $4.9 billion in venture funding in 2020, representing a 27% decrease over the same period last year (in a year when venture funding set a record), according to Crunchbase data through mid-December. We're missing a trick: Women-owned startups deliver more than twice as much revenue per dollar invested as those of men.

Work needs to be done by policy makers (subsidized childcare, paid family leave, etc.), but it's also an imperative for investors and corporates. Companies should embrace diversity and gender equality to help them gain a competitive edge through innovation, consumer insight, product development—and the bold decision-making empowered by diversity of thought. As BofA Global Research highlights, S&P 500 companies with above-median women in management see 30% higher return on equity (ROE) and 30% lower earnings risk one year out compared with their less diverse peers (Exhibit 6).

ESG disclosure and the power of flows has the potential to make a difference. Metrics on women, such as board diversity, equal pay and parental leave, may increasingly be reported and integrated into investment analysis. So it pays to lean in when it matters most: Sustainable fund flows accounted for nearly one-fourth of overall flows into funds in the U.S. in 2020—a record $51 billion and Social factors (the "S" in ESG) helped financial performance. Considering how to integrate a gender mandate into investments is more timely than ever.

Exhibit 6: Gender Diversity Correlates With Higher Future ROE.

Note: Data from 2010 on for % Women Managers. Note: High (Low) % of Women on Board defined as above (below) the universe median; High (Low) % of Women Managers defined as above (below) 30%.