The stock market, despite recent volatility, is still only 2% below a historic high. First quarter earnings are virtually over and were much better than expected. With the economy off to a strong start in the second quarter, it will no doubt result in another very positive rate-of-growth for earnings in the June ending quarter. If the pace of earnings surprises continue, a $200 EPS number for the S&P 500 in 2021 is not out of reach; at current levels, this would represent a P/E of 21x. As a sign of a resurgence in demand from a welcoming a reopening of the economy, revenues for the first quarter were also up double digit.
During the past few weeks, interest rates (10 year treasuries) have remained fairly stable and are still below their peak of two months ago, despite a sharp upward move in inflation, as demand for goods and services has strengthened . The bond market seems to believe the FED regarding the notion that sharply higher inflation stats will be transitory, i.e. perhaps lasting only several quarters and then stabilizing.
The pivot towards more economically biased sectors such as Energy, Financial, Industrials and Materials, which began late last year, continues. The rotation towards Value and away from Growth appears to have legs and is now clearly not just a developing trend but a force to be reckoned with by investors.
Given the current momentum in the economy as the pandemic fades further in the rear view mirror and buttressed by continuing accommodative monetary policy along with aggressive fiscal policies, with the current Administration motivated to go big, the stock market is set up for what could well be a summer rally leading to new record highs.
*The information contained in this article represents the opinion of RNC Genter should not be construed as personalized or individualized investment advice.