The scale and nature of the initial shock triggered by the Covid-19 pandemic was unprecedented, and likewise the subsequent recovery was exceptionally rapid. Ample stimulus, monetary and fiscal, extraordinary progress on the vaccine campaign front in developed markets and the significant level of pent-up demand (US households had an additional $2.250 billion in savings, the equivalent of 30 years of savings concentrated in one year) boosted the strength of the economic recovery, along with Record profit growth. Business and consumer sentiment returned to pre-pandemic levels just one year after the recession began. Unprecedented recovery speed and hardness.
All this has taken the S&P 500 index to new highs, so it is possible that the current recovery phase will surpass the post-global financial crisis.
Earnings continue to surprise on the upside, and we expect this growth to continue into 2022 for the S&P 500, although the pace of growth appears close to slowing. We expect earnings growth to be the main driver of US equity returns in the second half of 2021 and 2022.
The role of monetary and fiscal policy
During the height of uncertainty in March 2020, with markets collapsing, Federal Reserve Chairman Jerome Powell promised to use “the full range of tools available to support the US economy” until “more significant progress” is made toward a full economic recovery.
Over the past 16 months, the markets have experienced a surge in liquidity on an unprecedented scale. We believe there is no doubt that the unprecedented fiscal and quantitative easing measures have supported and underpinned the rapid recovery of risky assets. In contrast to the global financial crisis, on this occasion we also saw the use of “helicopter money” policies, which were directly targeting consumers and led to additional savings during lockdowns. Big savings, strong job opportunities and high confidence leave room for more upside surprises. Recently, we also witnessed a significant recovery of the real economy, which was reflected in a strong recovery in earnings.
Is the US recovery sustainable?
The critical question remains whether or not this recovery is sustainable. In the second half of the year, we expect growth to peak, monetary policies will continue to decline, with tapering on the horizon, fiscal stimulus will begin to wane, and corporate tax reform will become more likely. In addition to these potential headwinds, stock markets are currently showing high valuations, and instances of increased delta variables, along with concerns about rising inflation, have overshadowed an excellent corporate earnings season.
Despite these trends, stocks remain attractive, with pent-up demand continuing to unleash and growth remaining high, albeit more moderate. We will likely go back to a “different normal”, with a more normal level of growth. We are likely to move from an early stage to a mid-cycle consolidation stage, so investors should expect greater volatility in the second half of 2021. However, it is too early to give up on the idea of a recovery as stocks are still high.
Positive prospects despite headwinds
Valuations are high across all asset classes and a lot of positive news has already been priced in. Given the current starting point and the fact that the trends that underpinned the recovery in global economic growth are starting to fade, future returns are likely to be lower and it will be difficult to sustain the significant gains recorded thus far given the exceptional parameters. Investors will have to dig deeper to look for attractive opportunities.
In the world of stocks, we continue to focus on the topic of reopening, and we are positive about global stocks, which should see a rebound as economies return to growth. We expect more cyclical companies to continue to benefit from strong economic growth and global re-opening.
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