Stocks rose again last week with the S&P 500 Index up 1.2%, up 0.7% for the month of May, and an impressive 12.6% so far in 2021.

We remain optimistic on the market, which has been supported by strong profit growth ever since the economy emerged from last spring’s lockdown. While stocks are up 38% over the past 12 months, estimates for 2021 earnings are up an even better 41%.

Market leadership continues to come from sectors that were hurt the most by the pandemic and that stand to benefit the most from the reopening as the pandemic fades. We continue to favor these sectors including Energy, Financials, Industrials, Materials, and Travel & Leisure that are beneficiaries of the strong economic readings we continue to see.

U.S. Economic Readings Remain Encouraging

The Philly Fed state coincident indexes increased in 46 states in April, decreased in two, and were unchanged in two. These indexes continue to suggest a broad-based strong recovery as vaccinations, declining new cases, and more states easing restrictions lead to pent-up consumer demand being released.

The labor market continues to heal with initial claims for unemployment insurance falling another 38,000 last week, down in six of the past seven weeks, to 406,000, a new low since the start of the pandemic, and below the consensus estimate. The steady grind lower in jobless claims reflects fewer layoffs and continued improvement in labor market conditions.

An improving labor market is being reflected in consumer sentiment readings. While the Conference Board’s Consumer Confidence Index edged down in May, it remains consistent with above-trend economic growth. Consumers’ assessment of the present situation rose for the third consecutive month and to the highest level since March 2020—driven by a significant improvement in the job market.

Booming U.S. manufacturing conditions continued in May, with both the ISM and Markit manufacturing surveys indicating robust conditions. Markit’s survey hit a new high for the second month running in May, with new orders surging at a record rate. Improving domestic demand and record export sales as economies reopen from COVID-19 restrictions are supporting manufacturing. However, major supply chain disruptions are hampering production and leading to significant price pressures.

Global Manufacturing Boom Continues

The J.P. Morgan Global Manufacturing PMI signaled that the strong global upswing in the manufacturing sector continued in May, led by the eurozone, U.S. and U.K. Production rose at one of the fastest rates in a decade, as new order growth accelerated to an 11-year high. Twenty-four out of the 30 nations for which May data were available registered better business conditions. Europe was the bright spot as its PMI hit an all-time high, with Italy and Spain showing improvement.

The outlook remains positive, with manufacturers forecasting further increases in output over the next 12 months. However, supply chain disruptions have led to historically high vendor lead times and backlogs, which is causing higher inflation. Given strong new orders and continued supply chain disruptions, inventories should remain lean while production should remain strong—further supporting the economic recovery.

Upward Revision to Global Economic Growth

The OECD just released its revised outlook for 2021 and now expects global economic growth to be 5.8% this year, a sharp upwards revision from the December 2020 Economic Outlook projection of 4.2% for 2021. The OECD cited that vaccine rollouts in many advanced economies has been driving the improvement, as has the massive fiscal stimulus by the United States.

Strong economic and manufacturing data, which is leading to upward revisions for economic growth, is consistent with strong and improving corporate profitability. This provides the fundamental support for stock prices and favors the more cyclically exposed economic sectors.

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