Last week’s economic releases sent a confirmation signal for what the stock market has been indicating with its recent record highs—the economy is making a strong recovery from the pandemic shock.

We see lingering headwinds fading as the vaccine rollout accelerates, infection rates continue their rapid decline, and the economy ultimately fully reopens.

Retail Sales Benefitting from Stimulus

Retail sales spiked 5.3%, the most since last June, and far above the consensus of 1.2%. This more than made up for the decline in retail sales in the fourth quarter of last year, bringing the total sales volume to a new record high. Consumers benefitted in January from the $900 billion COVID relief package of late December that included enhanced unemployment benefits and stimulus checks.

All major retail sales categories posted strong gains, with several categories advancing by double digits. On a year/year (y/y) trend basis, retail sales were up 4.6%, nearly in line with the pre-recession pace. We anticipate consumer demand will remain strong in the coming months, as the vaccine distribution picks up and the economy reopens more fully. Estimates show excess consumer saving of about $2 trillion while the $1.9 trillion COVID relief bill now under consideration in Congress should provide additional fuel for retail sales.

Business Surveys Show Growth Accelerated in February

The Markit PMIs (timely business surveys) showed private sector growth accelerated in February. The services sector survey rose to its highest level since March 2015 and is up in four of the past five months. While the manufacturing sector survey was down for the first time since last April (partly due to extreme winter weather and supply shortages), it was still the second-highest PMI level since April 2010, indicating the manufacturing recovery remains robust.

Housing Remains a Bright Spot for the Economy

While housing starts fell in January (partly blamed on high lumber prices), building permits—a harbinger of starts to come—jumped 10.4%. This jump was the most since last July, to a 1.881 million unit annual rate, the highest level since May 2006. Moreover, the NAHB Housing Market Index (homebuilder confidence survey) continues to hover near a record-high level and suggests housing starts should continue trending up in the near-term.

Meanwhile, January existing home sales edged up to a 6.69 million unit annual rate, the second-highest level since April 2006. On a y/y basis, sales are up 23.7%, near the fastest pace since November 2009, with all four regions posting double-digit y/y growth rates. The months’ available supply held at a record-low 1.9, down from 3.1 a year ago. This suggests a strong need for additional new homes, to the benefit of future builder activity. Low mortgage rates, a shift toward suburban demand, favorable demographics, and pent-up demand support a positive housing market outlook.

Earnings Continue to Come in Better-than-Expected

With 89% of the S&P 500’s market capitalization reporting fourth-quarter results, earnings have surpassed estimates by an impressive 16.6% in aggregate, with 78% of companies beating their projections. While earnings were expected to contract by 11% at the start of earnings season, they are now set to expand by 4%—a huge accomplishment given the pandemic’s impact on the global economy.

For 2021, the S&P 500 earnings-per-share (EPS) is projected to grow 22% as the economy reopens. Cyclicals (Energy, Materials, Industrials and Discretionary ex-Internet Retail) and Financials are expected to lead the bounce back with EPS expectations of 65% and 22% vs. 17% and 10% for Technology and Non-Cyclicals.

Strong retail sales, business surveys showing acceleration, healthy housing indicators, and improving corporate profitability all bode well for the economic outlook and stocks—particularly cyclical stocks, including Financials, Industrials, Materials, and Energy.

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