The benchmark S&P 500 posted an impressive gain of almost 8.2% for the 2nd quarter on above-consensus earnings and continued economic reopening. The quarter began with a 5% dash higher by mid-April. Elevated inflation data released in mid-May drove a sharp but short-lived pullback, but the ensuing market trend was largely toward higher prices to finish up the first half of 2021. Earnings results posted during the quarter showed profits up more than 50% year-over-year. This rebound versus the onset of pandemic-driven lockdowns last year demonstrated accelerating economic activity buoyed by more people being out and about. Results also topped analyst estimates by north of 20% as each dollar of additional revenue produced more profits than assumed in financial models. At this stage in the market cycle earnings will likely drive stock price performance. The forward-looking market has projected a strong recovery, and results need to reflect that reality.
The U.S. economy grew 6.4% during the 1st quarter, with data and forecasts pointing to even stronger growth during the 2nd and 3rd quarters. The most optimistic outlooks see G.D.P. advancing by double-digit rates in each quarter. Growth will likely slow later in 2021 and into 2022 but may well remain more robust than the 2.0%-2.5% range customary over the past decade. The labor market continues to improve, though at a somewhat uneven pace. The U.S. remains seven million jobs short of the pre-pandemic total, but as the graphic above illustrates, businesses are hiring en masse. Given the Covid-driven job market dislocation, it will take time to match large numbers of jobs and job seekers. Schools returning to on-campus learning should alleviate childcare concerns for many prospective job seekers. Elevated inflation levels reflect an unprecedented surge in demand coupled with supply chain issues that many observers see as transitory as supply and demand dynamics normalize. Demand will likely continue to reflect an increasingly optimistic global economic outlook.
The broad market continued to advance during the 2nd quarter with the Real Estate sector leading the charge. Real Estate has historically been a defensive sector, but current circumstances offer an unprecedented cyclical element as shoppers return to malls, travelers return to hotels and businesses return to offices. Information Technology turned in market-beating performance as falling long-term interest rates provided a tailwind to counter the 1st quarter’s headwinds from rising rates. The market is also looking further into the future when long-term secular business growth returns to being a valued attribute amidst more normalized economic growth. This longer-term view also boosted Communication Services companies and their “tech-adjacent” platforms like content streaming. Energy topped the broad market as global mobility is still somewhat early in its recovery. Financials and Health Care largely performed in line with the S&P 500 return. Consumer Discretionary, Materials and Industrials lagged as the market has priced in a good deal of their anticipated cyclical earnings boost. Stronger share price performance for these sectors would likely be driven by results topping expectations going forward. Consumer Staples and Utilities lagged most dramatically as defensive sectors don’t typically get much of a boost from cyclical or secular growth.
Corporate profits continue to surprise the analyst community to the upside, so the earnings report cycle beginning in mid-July could provide a catalyst for stocks to continue the strong year-to-date performance. Earnings typically drive performance at this stage in the cycle, so management teams will indeed need to continue delivering. Investors will look for guidance on how firms continue to deal with supply chain bottlenecks and related pricing pressures. Strong consumer demand can help support profit margins until those issues subside. Continued labor market strength and additional job seekers getting hired could provide even more tailwinds for robust growth in a U.S. economy where consumers represent 70% of G.D.P.. Amidst even the most positive backdrops occasional market “hiccups” inevitably insert themselves, but investors are well-served to keep an eye on long-term goals and trends. A robust investing plan ensures these gyrations don’t disrupt near-term goals and are merely passing waves for those with an eye on the horizon.