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Brian Belski is chief investment strategist of BMO Capital Markets. The opinions expressed in this commentary are his own.

The US stock market averages are on pace to finish 2020 at record highs — despite a global pandemic that disrupted many aspects of business and life along the way. With so much uncertainty still surrounding the economy and financial markets, many investors are left to wonder what’s next for US stock market performance.

For our part, we believe stocks will continue their march higher in 2021. Indeed, this once-in-a-generation global health crisis was met with an almost unprecedented globally coordinated fiscal and monetary response, both of which have led to historically low interest rates and that are likely stay this way until the world can finally free itself from the pandemic. The combination of these conditions has typically supported continued stock market gains in the past, and we see no reason for 2021 to be any different.

    In addition, with the election now behind us, the likelihood for more fiscal stimulus has improved, while trade policy under the new administration is likely to become more stock market friendly. Furthermore, the positive news on the vaccine front will also add another layer of support for stocks, particularly once the inoculations begin to become widely available.
    After the pandemic recovery, we must tackle the national debt
    It is for these reasons we expect the US stock market to defy expectations yet again next year and deliver another solid return, as our expectation is for the S&P 500 to finish at 4,200 by 2021 year-end.
    Our stock market optimism does come with a few caveats, however.

    In general, we think that the ingredients that will deliver a roughly 15% gain as things slowly return to normal next year will be somewhat different than the ones that drove gains in 2020.
    Fear was seemingly the driving force for investing during 2020, and rightfully so. Unfortunately, scared investors have the tendency to focus on “safe bets,” and this approach led to overwhelmingly binary investment decisions, such as favoring growth stocks while shunning value stocks, or chasing a few high-flying mega-cap technology stocks while ignoring most other stocks.
    As fear subsides, these investment strategies are likely to give way to more fundamental ones, where stocks will be evaluated more on their individual merits than on “macro” factors, such as fiscal stimulus or Fed actions. In turn, this should help the market broaden out next year, creating plenty of stock-picking opportunities. This would be a big departure from 2020, where only a handful of stocks fueled gains.
    As the economy improves, more cyclical areas of the market — like financial stocks — will likely benefit. Although short-term interest rates are likely to stay near zero, longer-term rates will likely drift higher as economic activity picks up. This so-called steepening of the yield curve is typically a strong driver of financial stock performance. In addition, financials are one of the few areas within the market where valuation is not stretched, a characteristic that should be rewarded as the economy continues to dig itself out.
    2021 could be a tougher year for stocks

      Industrials are another area that should benefit as global economic activity slowly returns to normal since many stocks within the sector rely on other countries to generate earnings. Also, low interest rates in the United States are likely to keep the US dollar somewhat suppressed, another characteristic that typically benefits the performance of industrial stocks. Finally, consumer discretionary stocks are poised to continue performing well as the US job market recovers and consumers start to spend even more as pandemic restrictions that impacted big parts of the sector begin to subside throughout the year.
      In closing, we bid adieu to 2020 and look forward to another year of the unprecedent bull market in 2021. Be well and stay safe.
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