Stocks made record highs again last week and continue to benefit from better-than-expected corporate profits, lower COVID infection rates, an accelerating vaccine rollout, and the promise of additional fiscal stimulus from the Biden administration.

Fourth-quarter earnings results show corporate profitability, the primary support for stock prices, has already surpassed the pre-pandemic highs. Given significant pent-up consumer demand supported by excess savings, and the ultimate fading of the pandemic with the vaccines, we remain encouraged that stocks will continue benefitting from further profit growth.

Positive Earnings Season

Results accounting for 84% of the S&P 500 market capitalization show that fourth-quarter 2020 earnings-per-share are coming in 2% above fourth quarter 2019, easily surpassing analyst forecasts at the start of reporting season for an 11% year/year decline and registering a new record high. This is despite the virus surge of late last year that resulted in a significant headwind to activity for consumer-facing industries.

Consensus expectations are showing that S&P 500 earnings will grow to $174 in 2021, 5% above the 2019 level. These estimates have jumped by $5 in the last few weeks as strong fourth-quarter results have led to positive earnings revisions in 10 of 11 sectors. Given Biden’s proposed $1.9 trillion stimulus plan and a fading pandemic, we anticipate further upward revisions to future earnings could be in store.

Economic Recovery Continues despite Virus Headwinds

The OECD U.S. Composite Leading Indicator (CLI) was up for the ninth consecutive month, hitting its best level since March 2019, and eclipsing its pre-recession level. The CLI does suggest the economic recovery has lost momentum, following the initial surge after the reopening of the economy last spring and reflecting the renewed lockdowns as the virus surged late last year while fiscal stimulus effects waned. We expect economic momentum to improve, given late December’s $900 billion stimulus (with more on the way), while the pandemic fades.

In the latest Job Openings and Labor Turnover Survey (JOLTS) report, the number of hires dropped 6.7% in December to 5.539 million, the lowest level since last April. This was led by a steep decline in accommodation and food services, as the COVID resurgence in the fall necessitated new restrictions on mobility and gatherings in many states. However, the number of job openings edged up 1.1% to 6.646 million, a five-month high, led by professional and business services. We expect accommodation and food service hiring to improve significantly as the pandemic fades later this year.

Positive News on the Virus Front

Newly reported COVID cases in the U.S. fell to their lowest level in nearly four months over Presidents Day weekend, and daily reported deaths declined sharply from a recent spike. Monday’s figure of 52,000 new cases was the lowest since Oct. 18, 2020, and represents a drastic reduction from all-time highs of about 300,000 a day recorded in early January.

Meanwhile, the vaccine rollout continues to accelerate while the Biden administration now has orders for 600 million vaccines—covering all individuals in the U.S. currently eligible to receive the vaccine. We are also awaiting the FDA decision for Johnson & Johnson’s Emergency Use Authorization application with JNJ intending to provide the U.S. with 100 million single-shot doses by the end of June.

An increasingly successful vaccine rollout is important because it will allow for the unleashing of an estimated $2 trillion in excess consumer savings that will support pent-up demand, particularly for travel and leisure. This will also support employment growth in these hard-hit industries.

Positive Signals from the Bond Market

We are also encouraged by gradually rising government bond yields in the U.S. and elsewhere that we view as a sign of a sustainable global recovery. In addition, corporate bond spreads (the increased yield required to compensate for higher default risk associated with corporate debt) continue to narrow in a sign of an improving economic outlook. Mortgage rates are also at record-low levels that should continue supporting the housing market.

Disclaimer
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