As vaccinations continue to progress, most economic data are pointing to a strong recovery here in the U.S. Many economists are expecting GDP growth north of 5% for the year and analysts on Wall Street are forecasting very strong profit growth for companies. Interest rates have ticked up in recent months as economic activity builds, while commodity prices, broadly, are moving higher to reflect increasing demand.
Equity markets have responded favorably to the rebounding economy. At this writing, the Dow Industrials, the S&P 500 and the NASDAQ Composite indexes all sit right at all-time highs. In the rest of the world, equites are also recovering, though not quite as strongly as here in the U.S. The Dow Jones Global ex-U.S. Index is well above its best pre-pandemic levels and is hovering at a fresh high as well.
Three main factors are pushing stocks higher.
Vaccination Optimism
First, with 24% of Americans fully vaccinated against Covid-19 and a total of 198 million doses administered, there is growing optimism that we are on a path to economic recovery and a full reopening later this year. While the Covid variants could interrupt the progress of business across the country, it seems, at least today, that they will not hold things back too much. With more consumers out and about looking to satisfy their pent-up desires for shopping and eating out, retail sales, supported by the massive federal $1.9 trillion fiscal stimulus package, are surging, rising 9.8% in March over the year-ago period. The labor market is also healing, as weekly jobless claims reached a pandemic-era low of 683,000 last week.
Growing Corporate Earnings
Second, corporate earnings are set to grow significantly in 2021. As companies begin to report their earnings for the first quarter, analysts are expecting year-over-year growth of approximately 24% for the quarter. (Recall that late in 1Q20, many businesses were shutting down as the virus spread.) For the full year 2021, consensus estimates are for earnings to increase 22% over 2020, with more gains to come in 2022.
Fed Holding Steady
Third, the Federal Reserve’s monetary policy continues to remain accommodative, with Fed Chairman Powell stating that the Fed will likely taper its bond-buying programs first, before it begins to raise interest rates. This long-term forecast gives investors confidence that there will be no near-term rate hike surprises. With short-term rates, which are controlled by the Fed, stuck at zero, the main thing concerning investors is the level of long-term rates, which are determined by market forces. Rapidly rising long-term rates can indicate that pricing pressures are brewing, and growing inflation concerns can dent the confidence of both equity and bond investors.
While most data now point in the right direction for the economy and the markets, investors are already pricing in a robust recovery. The S&P 500 now trades at approximately 23 times its expected earnings for the next year, well above its five-year average of about 18 times. The main question now is whether corporate results will come through strongly enough to satisfy today’s eager and expectant investors.
We hope everyone is staying safe and well.
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