- New business formation has soared during the pandemic, even though it typically plummets during recessions. Similarly, we have witnessed a record number of unicorn births, especially in FinTech and Biotech.
- There are two primary reasons for the boom in start-ups and unicorns: the broad availability of financing, and the vastly improved digital ecosystem which has drastically lowered the upfront costs of starting a business.
- Regardless of recent progress, it is estimated the U.S. has only reached 18% of its digital potential, suggesting this shift in the structure of the economy is just getting started.
- Further, COVID-19 has primed the U.S. for another period of rapid productivity growth, driven by the swift adoption of digital technologies and an economy running at full steam.
- However, the stunning pace of digital innovation raises challenges for national accounts, which we believe understate economic and productivity growth by a full percentage point per year, while overstating inflation by a similar amount.
- Digitization is also profoundly disinflationary, which implies “lower for even longer” interest rates. This is especially beneficial for long-duration equities and the latest crop of unicorns.
- While pockets of speculative excess undoubtedly exist, tech and the overall S&P 500 appear fairly valued, provided they continue to produce solid free cash flow (FCF) growth and bond yields remain subdued.
- We expect digital platforms to represent the vast majority of equity market capitalization by 2025, with tech, health care, and communications the most promising sectors.
Download the full paper here
Part 1 of this series, The Pandemic Accelerant: Digital Age Business Strategies, can be accessed here.