Stocks rose again last week and we continue to see signs of a strong economic recovery.

While Friday’s labor market report was disappointing, it is inconsistent with most other labor market indicators that are signaling strong demand for labor. Encouragingly, business surveys are showing global economic growth accelerating to an 11-year high. First-quarter earnings results are also very strong with second-quarter forecasts continuing to rise. All of this supports a favorable outlook for stocks and especially economic sectors that have been hit the hardest by the pandemic, including Energy, Materials, Industrials, and Financials.

Business Surveys Continue to Signal Robust Recovery

While the April ISM Manufacturing PMI (a timely business survey) came in below expectations, the level of the index is still historically high and consistent with continued strong growth in manufacturing output. All 18 ISM industries reported growth, indicating the broadest factory activity expansion since 2004. Firms continued to point to raw material and component shortages as creating production bottlenecks and causing short-term shutdowns. Order backlogs surged at a record pace, a sign of significant operating pressures amid strong demand.

While the ISM Services PMI also slipped in April, it was still the second-highest level on record and historically consistent with above-trend economic growth. The combined latest readings of the ISM Manufacturing and Services PMIs correspond to about 4.7% annualized economic growth. This is nearly double the pre-pandemic pace, suggesting a continued robust recovery in the second quarter.

While April nonfarm payrolls expanded by a much less than expected 266,000, this is inconsistent with many other indicators that suggest a strengthening labor market. Unemployment claims broke below 500,000 and are at the lowest level since March 2020. Markit’s business surveys showed both manufacturing and services employment PMIs rising to strong levels in April. Job openings of 7.4 million are at the highest level since January 2019 (we get an update on job openings this Tuesday). Federal Reserve and Conference Board surveys also show strong employment expectations. All of this points to a strong demand for labor.

Auto Sales a Sign of Confident Consumer Demand

Light vehicle sales increased 3.1% in April to an 18.5 million unit annual rate, the highest level since July 2005, and the highest April sales rate on record. While demand is being boosted by the recently passed American Rescue Plan stimulus and easy credit conditions, it is also a sign of a healthy, confident consumer that is key to the economic recovery.

Global Backdrop Exhibiting Strong Momentum

The global economy grew at its fastest pace in over a decade, according to the latest global PMI data (business surveys covering over 40 countries and about 27,000 companies), which provides one of the timeliest reads on the world economy. The level of incoming new business rose for the 10th straight month in April. All six of the sub-industries covered by the survey saw expansions, up from five in March, including the consumer services industry following a five-month sequence of contraction.

The US, UK, and Australia are seeing the biggest gains in new business, while Brazil was the only nation to see a decrease in new orders. We expect further improvements in the global backdrop as vaccine rollouts gain steam internationally.

Earnings Are Stellar

With about 90% of the S&P 500 companies reporting first-quarter results, earnings are significantly exceeding expectations. Earnings have surpassed estimates by 22.1% in aggregate, with 86% of companies topping projections. Expectations are now for earnings-per-share growth of a robust 48% in the first quarter with the second-quarter estimate rising to 57%. We expect the strong economic readings we have been seeing to lead to further strong profit growth which provides the fundamental support for stock prices.

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