With the first quarter of 2021 behind us, many of our clients have been asking about the strength of the U.S. markets and economy. Given how relevant this topic is for every investor, we wanted to share our thoughts on interest rates, business performance, inflation, and potential risks for the year to come.
General Outlook: Strong fiscal and monetary stimulus, along with redounding growth in China and India, are significant contributors to the overall positive outlook for both the U.S. economy and equity markets. Over the past two years, more than $7 trillion in fiscal support was added to the economy—$5.2 trillion in 2020 and $1.9 trillion in 2021—and the Biden Administration has proposed a $2 trillion multi-year infrastructure spending package that could continue to strengthen the economy. With unemployment projected to fall by 4% by year-end and the economy anticipated to grow by 7% in 2021, we expect that markets will continue to outperform expectations.
Business: As of this writing, 84% of companies have reported earnings that have surpassed estimates for Q1, strengthening the projection that S&P 500 earnings will be between 25 percent to 35 percent for 2021. This forecast creates favorable tailwinds for stock markets, estimated to be up by as much as 20 percent this year. However, given this bullish outlook, traditional fixed income will face continued challenges due to increased medium and longer-term interest rates. As a result, it is vital to find fixed income alternatives that can weather rising interest rates and provide higher annual returns.
Inflation: There is concern amongst small businesses and equity markets that outsized government spending, post-pandemic consumer demand, and business investment will trigger inflation. Policy consensus, consumers, and current data suggest that after 3 percent to 4 percent price spikes in April and May, prices will settle into a 2.5 percent inflation rate in 2021 and 2 percent in 2022. These projections have the Federal Reserve reiterating that interest rates will likely remain where they are until 2023.
As we move closer to reopening, we are optimistic about continued upswings in economic and employment performance. That said, it is essential to remember that there are always risks to be mindful of and we are constantly assessing and repositioning based on the situation. If you are looking for more insights on industry trends, investments, and market outlooks, please be sure to visit our Insights page.