The earnings megatrend

Why 2021 could be the best year for earnings growth in more than a decade.

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So far in 2021, we've seen far fewer market surprises than in the previous year, and Fidelity's Steve DuFour thinks this may be a good sign for corporate earnings growth in the U.S.

"It's shaping up to be a great earnings year, led by improvement among auto companies and other manufacturers that couldn't operate at full capacity for most of 2020," says DuFour, portfolio manager of the $3.9 billion Fidelity® Focused Stock Fund (FTQGX), a concentrated portfolio of roughly 40 to 60 holdings that he says represent his best stock ideas.

DuFour estimates that 2021 aggregate earnings for companies in the S&P 500® index will increase at least 40% from 2020. If this happens, it would be the market's best annual earnings improvement since 2010. He adds that he's significantly bumped up his estimate since the start of the year.

DuFour says he's continued to identify opportunities for faster-than-average growth in the consumer discretionary sector, which he notes could continue to gain disproportionately from economic reopenings.

For example, among the fund's top holdings at the end of July was Caesars Entertainment (CZR), a regional gaming company he believes could benefit from pent-up demand for travel and entertainment, its strong loyalty program, and reduced promotional spending. He also sees potential upside from the launch of the company's new online gaming app.

Elsewhere, the fund held a large position in software provider Microsoft (MSFT), and DuFour added to the fund's outsized stakes in chipmakers Marvell Technology (MRVL) and On Semiconductor (ON) in July. He believes the latter two could benefit from a limited supply of chips and rapidly growing new technologies, such as 5G networks.

"I think each of these companies has potential for strong near-term earnings growth and exciting future growth opportunities," DuFour says. "Importantly, they all trade at reasonable valuations as well."

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