The year of the pivot

Just over a year ago—on February 19, to be precise—the capital markets hit their pre-COVID high. Looking through the lens of their movements can be instructive because, by placing value today on expected future performance, stock markets can serve as telescopes taking us forward in time.

To peer through that telescope, my colleague Peter Stumpner and I examined the share price movements of 5,000 of the world’s largest companies over the past 12 months. What we found suggests that most companies should look at 2021 as the Year of the Pivot. This is the time when big strategic moves can deliver a major payoff.

We found that capital markets went through four distinct acts. In the first act, spanning the month following the pandemic’s outbreak, all stocks declined sharply, with not one sector left unscathed. The downside seemed unlimited, all news was grim, and uncertainty was at peak levels. From mid-March to early June, we started to see big differentiation between sectors. Industries that were struggling before COVID-19 hit, such as energy and banking, continued to falter, but high tech and some consumer categories staged recoveries as the impact of the pandemic led to demand surges in some sectors.

By September, we entered Act 3 as the lifting of lockdowns caused a broader market recovery. Seven months after markets had bottomed out, almost half the sectors had fully bounced back from their mid-February lows. Finally, in Act 4, the struggling industries regained some ground as news of coming vaccines raised confidence and optimism, but the gap between them and the leading sectors continued to widen.

In each act, two things happened. First, the total average returns went up, from negative 30% in Act 1 to plus 20% in Act 4. Secondly, at every stage, the spread between sectors expanded, moving from 27 percentage points in mid-March to 80 percentage points today—the widest gap in recent history.

One group, which we call the Mega 25, delivered a level of outperformance that puts it in a category of its own. Collectively, these companies represented 40% of the total market gains, with each adding on average about $230 billion of market cap.

The Mega 25 fall roughly into four groups: North American technology, Asian technology, electric vehicles, and semiconductors, all sectors that are benefiting from strong demand trends. In fact, our analysis highlights a dramatic acceleration of many trends already in place before the pandemic—from ecommerce to telemedicine to even geopolitical tensions. These trends are reflected in broader sector performance: industries that surged ahead in the past 12 months were the same ones already thriving during the previous five years. These sectors were riding tailwinds that only grew stronger, while the existing headwinds for those lagging behind turned into hurricanes.

Finally, we saw an amplification of performance gaps within each sector. In every single industry, no matter its overall performance over the past year, some companies fell behind and others moved ahead. That’s because the same forces that drove the differences between sectors—namely, tech-forward, asset-light business models propelled forward by demand trends—influenced individual company performance. Think about it this way: when two people are running away from a bear, a small difference in strength and speed very quickly becomes a big difference in their chance of survival.

While most companies put their strategies on lockdown last year as they grappled with the crisis, spiking deal volumes and growing capital investment suggests that break is over. The capital markets tell us very clearly that the bear is speeding up. Those that fail to make bold bets to give them a jolt of momentum may fall behind and not survive through the recovery. What’s more, research on past crises shows that those who emerge from a downturn stronger than their peers keep that advantage for a decade or more to come.

In our just published article, we discuss how companies can pivot to gain the edge they need in the coming performance race. There is a massive opportunity, even an imperative, to make 2021 the year of big strategic choices. Your competitors are likely thinking the same thing. Don’t let them outrun you.

Connect with our Strategy & Corporate Finance Practice