Policy Shifts May Challenge Markets

Fiscal stimulus, which was central to the market rebound in the last year, may start moving to the sidelines over the rest of 2021 and into 2022 as the recovery continues. Economic growth can compensate for the loss of government checks to households and businesses, but potential tax increases may be more challenging for markets to navigate. Business tax increases, in particular, may gradually pull gains out of markets about equal to their size, but with economic growth supporting corporate earnings, we believe a positive backdrop for equities remains in place.

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Proceed With Caution In The Bond Market

After one of the worst starts to a year for fixed income, returns may not get much better from here. Long-term interest rates have traded sideways recently but we expect rates to potentially rise further, which would put downward pressure on bond prices. We’re not giving up on high-quality fixed income though, as Treasury securities have shown to be the best diversifier during times of equity market stresses.

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Stock Market Gains Likely to Slow

After one of the best starts to a bull market in history, the rally has started to show signs of fatigue. A strong economic recovery lies ahead as the roepening continues, bolstering a very strong earnings outlook that is helping stocks grow into elevated valuations. However, in the second half of the year, as inflationary pressures build, interest rates potentially rise further, and this bull market gets a little older, the pace of stock market gains will likely slow and come with more volatility.

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Economy Picking Up Speed

The economic recovery continues, as the recipe of vaccines, the reopening, and record stimulus all have combined to produce what should be one of the best years for growth ever. Although some economic indicators could be peaking or about to peak, the stage is set for this cycle of growth to continue for many years, which may surprise some investors. We discuss why inflation might be in the headlines, but still shouldn’t be a major worry for investors.

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Amazing Earnings Season

It’s embarrassing to admit this but in our earnings season preview on April 12, when the consensus estimate reflected a nearly 24% increase, we wrote that S&P 500 Index earnings growth for the first quarter could potentially exceed 30%. Fast forward to today and earnings growth for the quarter is on pace to double—yes, double—that 24% growth rate, which would mark one of the biggest upside surprises ever recorded. Here we look at how corporate America produced such a blowout earnings season and what it could mean for the outlook.

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Time To Sell In May?

Sell in May and go away”1 is probably the most widely cited stock market cliché in history. Every year a barrage of Wall Street commentaries, media stories, and investor questions flood in about the popular stock market adage. We tackle this commonly cited seasonal pattern and why some seasonal weakness could make sense in 2021.

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Is All The Good News Priced In?

Last week we discussed whether stock prices might be reflecting peak optimism. In that commentary we noted that while sentiment may be overly optimistic and a pickup in volatility would be totally normal, strong breadth measures suggest stocks still may have more upside. This week we tackle that same topic of peak optimism, but by looking at some valuation metrics. While valuations are elevated, they still appear reasonable when factoring in interest rates and inflation.

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Peak Optimism?

Global stock markets are off to a strong start in 2021 as the world begins to emerge from the shadow of the COVID-19 pandemic. In the United States, vaccinations are increasing, the economy is expanding, unemployment is falling, and stimulus continues to flow through the economy. With the consensus crowding into an optimistic corner, many investors are wondering if sentiment may be running too hot.

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The Earnings Boom Is Here

The outstanding fourth-quarter earnings season we had in 2020 is a tough act to follow, but 2021’s first quarter has the makings of another potentially great earnings season. The reopening of the economy continues to move forward, and corporate America has done an excellent job managing through the pandemic. In fact, it won’t take much of an upside surprise for year-over-year S&P 500 Index earnings growth to reach 30% this quarter. The 2021 earnings boom is here.

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Raising Forecasts…AGAIN

The U.S. economy’s recovery from the pandemic continues to surpass our expectations, aided by the accelerating vaccine distribution, massive stimulus, and America’s desire to resume some semblance of normal daily life. Despite having raised our 2021 economic and earnings growth forecasts on February 8, we are doing so again. We are also raising—and narrowing—our 10-year Treasury yield forecast range. Our S&P 500 Index target remains unchanged.

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